How to get a personal loan

If you’re wondering how to get a personal loan to consolidate debt or to fund a large expense, here’s what you need to know. (iStock)

You may consider a personal loan for many reasons, such as paying off high-interest debt, covering sudden emergencies or making a major purchase. Depending on your credit history and other personal factors, you might be able to get a personal loan with a competitive interest rate. And you can apply for prequalification without affecting your credit score.

If you’ve decided that a personal loan is the right financial product for you, here’s a look at how to get one, what you can do with the money and what to expect from the application process.

Credible makes it easy to compare personal loan rates from multiple lenders.

• Where can I get a personal loan and what can I use it for?
• How to get a personal loan
• What are the requirements to get a personal loan?
• Personal loan pros and cons
• Can I get a personal loan with bad credit?
• What should I do if I can’t get a personal loan?
• Alternatives to a personal loan

Where can I get a personal loan and what can I use it for?

You can find personal loans from financial institutions like banks and credit unions, and many online lenders also specialize in personal loan products. 

Online lenders are one of the most convenient options for personal loans. These lenders offer an easy online application process and are able to fund loans quickly — often within one to three business days. Because online lenders typically don’t have the expenses associated with maintaining a physical branch, they’re usually able to offer lower interest rates and better terms than other lenders. This makes them a great option when you’re shopping around.

Credible lets you compare personal loan rates from top online lenders in as little as two minutes.

You can take out a personal loan for a number of purposes, including:

• Pay off or consolidate existing balances, such as credit card debt or an auto loan
• Fund home improvement projects or renovations
• Cover large expenses, such as a wedding or vacation
• Foot the bill for unexpected costs, like car or home repairs
• Cover emergency expenses
• Pay for medical or dental procedures

Aside from using the money to gamble or engage in illegal activity — or pay tuition expenses, in some cases — there aren’t many limitations on how you can use a personal loan.

How to get a personal loan

So, you’ve decided to take out a personal loan. Here’s what you need to know about the process, what you can do to get approved for that loan, and how you’ll receive the funds.

Decide how much you need to borrow

Before you apply for a personal loan, determine how much you need to borrow. If you’re planning to use a personal loan for debt consolidation, add up your existing credit card balances and other debts. If you plan to use the loan to pay off an auto or other installment loan, you may need to obtain payoff quotes from your other lenders. 

Check your credit reports 

When you apply for a loan, lenders will check your credit to determine whether to offer you a loan, and to calculate what interest rate to offer you. Knowing where your credit stands before you apply can be very valuable and may give you an idea of the loan options available to you.

You can request a free copy of your credit report from each of the main credit bureaus — Equifax, Experian and TransUnion — from AnnualCreditReport.com. Look for common inaccuracies, which could include accounts that don’t belong to you or incorrect derogatory reports (like a late payment that was actually on time). If you find any errors, report them to both the creditor and the credit bureaus to have them removed and potentially boost your credit.

Shop around 

Comparing multiple lenders can be a great way to not only see the options available to you, but to ensure that you get the best possible deal on a personal loan.

Consider using an online lender platform like Credible to compare offers from multiple lenders at once, without affecting your credit. 

Get prequalified

Personal loan prequalification can tell you which loans you’ll likely qualify for and what to expect in terms of rates and monthly payments. This can help you narrow down your list and pick the lenders that best suit your needs. 

Getting prequalified for a personal loan involves a soft pull of your credit, which won’t affect your score.

Compare loan details

Now that you’ve shopped around and gotten prequalified with multiple personal loan lenders, it’s time to review your offers. This will help you decide which lender to officially apply with.

Compare these important factors when reviewing loan offers:

• APR — The annual percentage rate takes into account your interest rate and any fees, so it’s more accurate than looking at your interest rate alone.
• Repayment term — This is how long you’ll have to repay the loan, which affects the monthly payment amount. Personal loan repayment terms typically range from one to seven years.
• Fees — Some lenders charge fees — such as origination or late payment fees — on personal loans. These fees can add to the total cost of your loan, so be sure to check with lenders to see what fees they charge.

Apply for the loan

After deciding on a lender, applying for your personal loan is the next step. When you submit a personal loan application, the lender will run a hard credit pull to check your credit report and make an official decision on what interest rate and terms to offer you. This hard pull is added to your credit report and may temporarily lower your score by a few points.

As part of the application process, you’ll need to provide certain information to the lender. This could include your address, phone number, birth date, Social Security number and driver’s license number. The lender may also ask you to provide details of employment, proof of income and recent tax returns.

Close the loan

You’ve shopped, you’ve applied and you’ve been approved. Now, it’s time to close your loan. Closing is the final step in the personal loan process. Once your loan closes, the contract is official and the funds are disbursed in one lump sum. 

In order to close on your new personal loan, you’ll be required to sign a loan agreement, or promissory note. This contract outlines how much you’re borrowing, the interest rate and repayment schedule you agree to and any other terms your lender requires.

You may receive your loan funds as quickly as the same day or the next business day, depending on the lender and when you close your loan. These funds may be deposited electronically into the bank account of your choosing, or you can request a paper check.

What are the requirements to get a personal loan?

When deciding whether to offer you a personal loan, lenders consider a few important factors to determine whether you can afford the new loan and how likely you are to repay the debt as agreed.

Requirements vary from one lender to the next, but they’ll typically look at the following:

• Credit score/history — How well you’ve managed debt in the past can be a good indicator of how you’ll manage future debt. Lenders will look at factors such as your credit score, your payment history, the mix of credit-based accounts you hold and how long you’ve been managing these accounts. Derogatory reports, such as late payments or charge-offs, can seriously impact your approval.
• Income — Before offering you a personal loan, a lender wants to be sure that you can comfortably afford the monthly payments.
• Debt-to-income ratio — The more debt you hold, the more risk you may pose to a new lender. Lenders will calculate your debt-to-income ratio (DTI), which tells them how much of your income already goes toward existing balances. Personal loan lenders typically like to see a DTI ratio no higher than 40%. If your minimum monthly payments consume too much of your income, you may not be approved for your new loan.
• Collateral — Personal loans are typically unsecured, meaning you don’t have to put up collateral. But a secured loan that holds certain assets as collateral (such as a savings account, vehicle, or certificate of deposit) may make obtaining a loan easier or more affordable.
• Cosigner — If you don’t qualify for a personal loan on your own, or if you want to get a lower interest rate and better loan terms, you may be able to add a cosigner with good credit, such as a parent or spouse. This individual is held equally responsible for the timely repayment of your new loan. If you fail to make payments, your cosigner will be on the hook to pay off the loan.

Personal loan pros and cons

Like any financial product, personal loans come with advantages and disadvantages to consider. 

Pros of personal loans

• Fast and flexible funds — You can use a personal loan for almost any purpose, and depending on the lender, loans can be disbursed in a matter of days or even hours.
• Lower rates than other types of credit — Compared to credit cards, personal loans usually come with much lower interest rates.
• Require no collateral — Personal loans are typically unsecured loans, so you won’t be required to put up collateral to get the loan.

Cons of personal loans 

• Possible fees — Some lenders may charge origination fees when your loan is issued, or you could be subject to prepayment penalties if you pay off your loan early. This can increase your overall cost of borrowing.
• Lack of payment flexibility — A personal loan is an installment-based product. This means that you’ll receive the money in one lump sum and pay the debt back with equal monthly payments for a set term.
• Potential damage to your credit — If you default on your personal loan or fail to make payments on time, it can hurt your credit. Late payments can stay on your credit report for up to seven years.

Can I get a personal loan with bad credit?

As with most financial products, it’s easier to get approved for a personal loan if you have good or excellent credit. It’s still possible to get a personal loan with bad credit — it just might take a bit more effort.

Some lenders work specifically with people with bad credit. Just keep in mind that the lower your credit score, the higher the interest rates you’ll be offered. If your credit score is too low, you may need to add a cosigner with good credit to your loan in order to get approved. You could also consider applying for a secured personal loan, which will involve putting up an asset (such as a bank account or car) as collateral.

Credible makes it easy to compare offers from multiple lenders in minutes. 

What should I do if I can’t get a personal loan?

A lender might deny someone a personal loan for several reasons, including having a credit score that’s too low, having no credit history, carrying too much existing debt already or not having a high enough income.

If you don’t get approved for a personal loan, here are six steps you can take to improve your chances of qualifying for a personal loan in the future:

1. Find out why your application was rejected. Review your application for any mistakes that might have been included. If everything is correct, try to find out why you weren’t approved. A lender will often tell you why your loan application wasn’t approved, especially if it was due to your credit history.
2. Work to improve your credit. The better your credit, the more likely you are to be approved for products like personal loans. Make payments on time, reduce your overall debt burden and boost your credit mix to help improve your credit for the future.
3. Boost your income. The more you make, the easier it is to reduce your DTI ratio, even without paying off existing balances. Consider taking on a side hustle to boost your income, which could help you meet lenders’ minimum income requirements.
4. Apply for a smaller loan. The more money you want to borrow, the higher the lender’s credit score and income requirements will likely be. Applying for a smaller personal loan instead could increase your chances of qualifying.
5. Consider adding a cosigner. Adding a cosigner with good credit can turn a rejection into an approval, or simply unlock better loan terms.
6. Get a credit-builder loan. Credit-builder loans have shorter repayment terms than typical personal loans, often ranging from six months to two years. Your funds are deposited into a savings account with your lender, and you’ll make regular principal and interest payments that are reported to each of the three major credit bureaus. At the end of your loan term, the lender will return your funds — helping you build credit and save money simultaneously.

Alternatives to a personal loan 

If you decide that a personal loan isn’t right for you, or you can’t get approved for a loan right now, consider these alternatives:

• Use a balance transfer offer. Many credit cards offer 0% introductory APRs to new cardholders on purchases and balance transfers. By transferring your existing balances to one of these cards, you can work to pay off your debt without incurring new finance charges. Just be sure to pay the balance in full before the promotional period ends, or you’ll start accruing interest at the card’s regular rate (which could be higher than a personal loan interest rate).
• Pull from existing home equity. If you have equity in your home, a home equity loan or home equity line of credit (HELOC) can let you tap into this value. Since these products are secured by your home, it’s often easier to get approved. But if you default on your payments, the lender can seize your home.

Avoid payday loan scams

Payday loans are short-term, high-interest loans, typically for $500 or less. Payday loans are usually due two to four weeks after origination, and hold your next paycheck as collateral. These loans can often look attractive to borrowers who are in a financial pinch and have low credit scores, but they come with extremely high interest rates — often as high as 400% APR.

If you need money quickly, consider using Credible to compare rates from legitimate personal loan lenders. Many online lenders are able to fund personal loans as soon as the same or next-day of approval.

Credible makes it easy to compare personal loan rates without affecting your credit score.