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How to get approved for a personal loan

Follow these steps to increase your chances of getting a loan

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A personal loan can help you with a variety of expenses, from funding your dream vacation to paying off a large chunk of debt to making home improvements. When you are approved for a personal loan, you can have your approved funds from the lender in your bank account within a few days.

Personal loans aren’t the best financial solution for everyone, so make sure you’re getting the best possible annual percentage rate (APR) and that the loan is affordable. You’ll also want to make sure you meet all the lender and application requirements to increase your odds of getting approved.

Key insights:

  • Personal loan rates are based on the borrower's credit score, income and debt-to-income (DTI) ratio.
  • Personal loan rates typically range from 6% to 36%, depending on creditworthiness.
  • Apply for a loan through a bank, credit union or online lender, but steer clear of payday lenders.

What is a personal loan?

A personal loan is a type of financing that allows individuals to borrow money for their own use, usually at a fixed interest rate and with a set repayment schedule. Personal loans differ from other types of loans in that they are unsecured. In other words, they don't require collateral, like a home or car, that the lender can take if the borrower fails to pay back the loan.

Personal loans can be used for almost any purpose, such as consolidating debt, funding home improvement projects, paying medical bills or financing large purchases like furniture or appliances. Depending on the lender, some borrowers may get fast approval and same-day funding.

Personal loan amounts typically range from $1,000 to $50,000, with rates ranging from 6% to 36%. Your creditworthiness and income level will determine your approved loan amount and rate. Generally speaking, higher credit scores and larger income levels will result in more generous borrowing terms, although many lenders will work with borrowers who have bad credit. To receive the best terms and lowest interest rate possible, you should shop around with multiple lenders before applying for a loan.

How can I get approved for a personal loan?

The first thing you should do before applying for a new loan is to check your credit score and request a free credit report. Check for any negative activity that could be weighing down your score. Dispute any mistakes and contact lenders directly with a goodwill letter for missed payments.

If you have a negative mark on your credit report for missed payments, consider sending the lender a request to have it removed, especially if you’re now current on payments.

A goodwill letter is a polite request for the creditor to remove negative marks from your report. It is best if you can explain to the creditor that the missed payment was during a financially hard time and that you have repeatedly made on-time payments since. A goodwill letter does not guarantee the removal of the negative mark, but it is worth a try.

Once you know your credit score, you can start getting pre-qualified and shopping around for the best rates. If you don’t like the rates you’re getting, consider taking a few months to work on your credit score first. Paying down some credit card debt lowers your credit utilization ratio (how much total credit card debt versus total credit card limit), which accounts for 30% of your FICO score.

Additionally, if the lender allows a co-signer, one can be added to help you secure a better rate and increase your chances of approval. Select a co-signer who has a higher credit score and income level than you for the best results. Remember, adding a co-signer to your loan is risky for that person, since it means they will be on the hook for any money you don’t pay.

Finding the right lender for a personal loan

Most personal loans you will see advertised are for unsecured loans at a fixed rate. This means you don’t have to attach collateral to your loan, and you will never be surprised by increased interest rates over the life of the loan. Some lenders will offer secured personal loans for individuals with bad credit. These loans require the borrower to attach collateral, such as a savings account.

In addition to checking APRs, you should look for certain features in a lender, including:

  • Ease of application
  • Low fees
  • Account management options (e.g., mobile app, ability to adjust due date)
  • Speed of funding after approval

There are a few different types of lenders you can choose from. Banks, credit unions and legitimate online lenders are safe to borrow from, but payday lenders make it hard for a borrower to escape loan debt.

If you have an account in good standing with your current bank, applying for a personal loan with it can come with perks. Some banks will give preferred approval to current customers, and if your bank is a traditional brick-and-mortar bank, you can complete the process in person.
Many times credit unions are able to provide members with lower rates than a traditional bank. Depending on your credit union, you might also have more flexible repayment terms, too.
These lenders streamline the loan process through online applications, making it possible to get your money as soon as the same day.

Payday lenders should be avoided if possible. According to Lyle Solomon, principal attorney at Oak View Law Group, a law firm based in Auburn, California, “Payday loan APRs are typically 398%.” This rate is much higher than the rates you receive with other personal loans.

“The majority of payday lenders charge a fee of between $15 and $30 for every $100 borrowed,” he said. “In addition to the initially borrowed money, these charges add up quickly over a short period and are frequently quite challenging to pay.”

How to apply for a personal loan

Applying for a personal loan online shouldn’t take longer than 30 to 45 minutes. To make the process as efficient as possible, plan on having the following ready:

  • Your full name
  • Your Social Security number
  • Income and employment verification
  • Proof of address
  • What you will use the loan for

Alternatively, you can apply for a personal loan in person if you choose your local bank or credit union. Applying over the phone might be an option with some lenders, too.

Many lenders will send you an approval decision within a few days, though it is not uncommon for a lender to ask for more documentation before issuing approval. If you are not approved for the loan, a lender will let you know the reason. Even if you are approved for a personal loan, you can still change your mind before you sign the agreement without any consequences.

Remember that every time you apply for a loan, the lender will do a hard credit check, which does temporarily impact your credit score. Look for lenders that offer pre-qualification without a hard credit inquiry, which allows you to see what offers you qualify for with no effect on your credit score.

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    How will a personal loan affect my credit score?

    When you formally apply for a personal loan, your credit score will decrease slightly because the lender does a hard pull of your credit. However, a personal loan can ultimately help your credit score, especially if you are using it to pay off credit card debt.

    What is the maximum amount I can borrow?

    The maximum personal loan you can borrow depends on the lender and your creditworthiness. Some lenders allow up to $100,000 in funding for select applicants — typically those with excellent credit scores and high incomes.

    What are the fees associated with a personal loan?

    Besides interest, most lenders charge an origination fee, which covers the underwriting costs associated with your loan. This can range from 1% to 8% of the loan amount. Be aware of any late fees and prepayment penalties a loan might have before agreeing to the terms.

    Bottom line

    Personal loans are a good choice for individuals who need fast funding for a variety of expenses. It makes the most sense to get a personal loan if you can secure a low APR and afford the monthly payments. If you are desperate for quick funds but don’t have a good enough credit score or income to qualify for a loan from a bank, credit union or online lender, explore other options before getting a loan through a payday or title lender; the high APRs from those lenders will hurt your finances more than help them.

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