A personal loan can be used to fund a host of financial situations — from emergency necessities like medical bills to the far more fun, like international vacations. Regardless of how you use your personal loan, there are requirements and qualifications you must meet, as well as crucial options to consider. Before beginning the personal loan process, review the steps below and ensure you make an educated and informed decision on which personal loan is right for you.
1. Check your credit score
Your credit score and credit history play a big role in qualifying for a loan. Your score affects everything from your interest rate to your loan approval.
You are entitled to one free credit report each year from each of the three reporting bureaus detailing your active credit accounts, credit inquiries and collection information. It’s important to take advantage of your free reports and review them in detail because incorrect information can appear, either as the result of an error or identity theft. Stay vigilant and report errors as soon as you see them so you can repair your credit history.
2. Consider your loan options
Whether you want to apply for a traditional personal loan, a more flexible line of credit or a specific-use secured loan like a mortgage or auto loan, you have a few options. Review the list below to see how each type of loan works and determine which choice is best for you.
- Personal loan: A personal loan is an unsecured loan, meaning there is no collateral behind it — like there is with a mortgage or auto loan. They are a very broad type of loan, often used for anything from home repairs to medical expenses. Personal loans can be attractive because they often have better rates than credit cards and other financial solutions.
- Personal loans for bad credit: You may still qualify for a personal loan even with bad credit. Personal loans for bad credit will have higher interest and annual percentage rates and may also have stricter term options. Still, they’re a much better option than payday loans, which have notoriously high, predatory rates and are often marketed to those with poor credit.
- Line of credit: A line of credit is similar to a personal loan in both the requirements and the application process. The main difference between the two types of funding is a personal loan is paid out as a lump sum, while a line of credit allows an individual to borrow up to a credit limit over time, as needed.
- Mortgage: A mortgage is a loan given to fund the purchase of a home. This is a type of secured loan where the funds can only be used for a specific purpose, unlike a traditional personal loan, which has broader uses.
- Car loan: Like a mortgage, a car or auto loan is a secured loan with specific intent. Car loans are offered through banks, credit unions and sometimes even directly from a dealer.
- Small business loan: A small business loan is essentially a personal loan for your business. Business loans can be a little harder to qualify for than a personal loan, especially if your business isn’t established yet. The lender will consider your personal credit, business credit and business plan when deciding if you and your business are creditworthy.
3. Determine what you can afford
A personal loan can be a great tool to fund any number of needs, but before pursuing any loan you need to determine what you can manage based on your income. When comparing loan offers, look at the rates, terms and projected payments to determine what you can afford. Many lenders offer calculators on site to understand what repayment looks like. Take advantage of these tools, or create your own using a spreadsheet so you know ahead of time that you’re not biting off more than you can chew. Failure to repay a loan or multiple late payments can negatively affect your credit score in a major way.
4. Find the right personal loan company
Once you know what type of loan you need, the next step is to select a lender. Banks, credit unions, online lenders, peer-lending companies and private lenders all offer personal loans. To find the right personal loan company we recommend comparing interest rates, APR, available loan terms and the minimum credit score required.
You can often pre-qualify for a personal loan by filling out an online application. Once you have selected your top lenders, find out how and where to apply for a personal loan from those loan companies and see if they have a pre-qualification process you can begin. Doing this will allow you to compare your custom rates from multiple lenders and help ensure you pick the best personal loan company for your unique needs.
5. Apply for the personal loan
Once you’ve decided on a lender, it’s time to apply for the loan. Most modern lending companies have an online personal loan application process, but you may need to visit a location in person to sign documents.
To apply, you’ll need your personal information including your social security number, employment and income information. If you plan to apply with a co-applicant or cosigner, you’ll need this information for each party involved. During the application process, you’ll specify the amount you want to borrow, and you may discuss how you’re planning to use the loan. Most online loan applications don’t take more than 15 minutes.
When you apply for a loan, the lender will run your credit to determine if you meet the personal loan requirements for their services. Personal loan qualifications can include a minimum credit score or annual income, among other factors. If you’ve already pre-qualified for a loan from the company, you won’t have to worry about this step. Having a creditworthy cosigner can help those with minimal credit histories or subprime credit scores qualify for personal loans.
Personal loan eligibility factors:
- Credit score
- Debt-to-income ratio
- Employment history
- Your age
- Length of credit history
- Payment history
- Creditworthy cosigner
6. Get the personal loan approved
Depending on the type of lender you choose, approval can take anywhere from a few hours to a few weeks; however, the application, approval and funding process generally doesn't take longer than one week total. Some lenders can even provide same or next day funding after approval.
After you’re approved, you’ll receive your funds and begin the repayment process as agreed upon in your contract.