Content of the material
- 1. How much do I need?
- Where Can You Find a Personal Loan?
- Tips for speeding up the process
- How to Get a Personal Loan
- 5. Can I afford the monthly payment?
- Why Is My Personal Loan Interest Rate Higher Than My Mortgage or Auto Loan Interest Rate?
- 5. Consider ways to increase your odds of approval
- 4. Apply
- 3. Debt-to-income Ratio
- 2. Apply for prequalification
- How to Apply for a Personal Loan
- A personal loan to pay off debt
- What Is a Personal Loan Used For?
- 7. Gather your documents and formally apply
- What do I need to get a personal loan?
- Still have questions?
- Factors that will affect your interest rate
- Are Personal Loans Secured?
1. How much do I need?
The first step in choosing a personal loan is knowing how much you need. The smallest personal loan sizes begin at around $500, but most lenders offer a minimum of $1,000 to $2,000. If you need less than $500, it might be easier to save up extra cash in advance, or borrow the money from a friend or family member if you're in a pinch.
For borrowers looking for smaller loans, PenFed, a federal credit union, provides a wide range of personal loan options, and customers can borrow as little as $600 or as much as $50,000.
Where Can You Find a Personal Loan?
You can find a personal loan in the following places:
- Your bank or credit union
- A peer to peer lending site
- An online loan provider
- A referral from a friend or family member
- A private loan from an investor
Tips for speeding up the process
If you’re looking for a personal loan, you likely want to get your hands on the money as soon as you can. These tips can help you avoid delays when applying for a personal loan.
- Check your credit report before applying. Know where your credit stands before shopping around for personal loans. Spotting and correcting errors immediately is a simple way to avoid issues later on when you’re applying for a loan.
- Pay off debt. If you have debt and you don’t need the loan funds urgently, paying some debt off can raise your credit score and lower your DTI ratio, which can increase your chances of approval.
- Talk to your existing financial institution. Banks and credit unions might be more willing to consider a personal loan application from a customer with whom it’s had a positive, long-standing relationship.
- Consider online lenders. Many online lenders offer next-day loan decisions, and funds may be deposited into your bank account within a few days after applying, if you are approved.
- Pick loan funds up in person. If your lender has a brick-and-mortar location, ask if there is an option to pick funds up at the branch so you can get the money faster.
How to Get a Personal Loan
You can often complete personal loan applications online, and a decision may be available as soon as the same day. However, there are a few things you should do before you even fill out the application. If you’re ready to apply for a personal loan, consider these steps before beginning the process:
- Check your credit score
- Take steps to improve your score by checking for inaccuracies and paying down debt
- Decide how much you want to borrow
- Use lender prequalification to shop around for competitive rates
- Submit a formal loan application
Related: How Do Personal Loans Work?
5. Can I afford the monthly payment?
When you apply for a personal loan, you have the opportunity to choose which repayment plan works best for your income level and cash flow. Lenders will sometimes provide an incentive for using autopay, lowering your APR by 0.25% or 0.50%.
Some people prefer to make their monthly payments as low as possible, so they choose to pay back their loan over several months or years. Others prefer to pay their loan off as quickly as possible, so they choose the highest monthly payment.
Choosing a low monthly payment and a long repayment term often comes with the highest interest rates. It might not seem like it because your monthly payments are so much smaller, but you actually end up paying more for the loan over its lifetime.
As a general rule, borrowers should aim to spend no more than 35% to 43% on debt, including mortgages, car loans and personal loan payments. So if your monthly take home pay is $4,000, for instance, you should ideally keep all total debt obligations at, or under $1,720 each month.
Mortgage lenders in particular are known for denying loans to people with debt-to-income ratios higher than 43%, but personal loan lenders tend to be a bit more forgiving — especially if you have a good credit score and proof of income. If you think you can temporarily handle higher payments in order to save a lot on interest, you may be able to stretch this ratio a bit to take on a higher monthly payment.
It's harder to be approved with a debt-to-income ratio above 40%, and stretching yourself too thin could lead to cash flow problems. You should only do this as a temporary measure and if you have some kind of safety net, such as a partner's income or an emergency fund.
Why Is My Personal Loan Interest Rate Higher Than My Mortgage or Auto Loan Interest Rate?
A secured loan on a mortgage or car loan is backed by the actual asset – in this case, the home or car, respectively. Therefore, if you fail to make payments and default, you are at risk of losing the asset.
On the other hand, an unsecured personal loan has no collateral so the lender assumes the risk on your promise to repay.
It’s for this reason that unsecured loans have higher interest rates: They create a higher risk for the lender. “It’s important to remember that even with a higher interest rate, the total cost of a personal loan (Finance Charge) can be significantly lower than borrowing from a home because the term is significantly shorter,” Parker adds.
5. Consider ways to increase your odds of approval
Lenders look at your credit history and debt-to-income (DTI) ratio when determining your eligibility for a personal loan. If you have bad or no credit or a low income, then you may not qualify for a personal loan at all. If you didn’t get any personal loan offers, consider these steps to become a more eligible applicant:
- Improve your credit score. Consider signing up for a secured credit card or paying down credit card debt to lower your credit utilization ratio.
- Increase your income. Find a pathway to a promotion at work, ask for a raise or consider taking on another source of income.
- Consider a secured loan. Banks and credit unions may let you borrow a personal loan against your savings account or certificates of deposit.
- Ask a cosigner for help. You may have a better chance of getting a loan if you have a cosigner with good credit to help.
Once you comparison shop and choose an offer, you can complete your loan application.
Remember, prequalification doesn’t guarantee that you’ll be approved for a loan. You’ll still need to submit additional information to the lender in order to complete your application.
The lender will tell you exactly what you need to submit. Some information might include …
- Monthly housing cost
- ID verification
- Social Security number
- Income verification
Finalizing your loan approval will typically result in a hard credit inquiry — this may affect your credit scores, but shouldn’t do any long-term damage.
3. Debt-to-income Ratio
Debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that goes toward her monthly debt service. Lenders use DTI to predict a prospective borrower’s ability to make payments on new and current debt. For that reason, a DTI less than 36% is ideal, though some lenders will approve a highly qualified applicant with a ratio up to 50%.
2. Apply for prequalification
Once you’ve checked your credit, you’re ready to apply for prequalification.
Prequalification is an application process where a lender reviews the information you’ve shared, and gives you a loan offer that you might qualify for. When you get prequalified, the lender will typically pull a soft credit inquiry, which won’t affect your credit scores.
While getting prequalified doesn’t mean you’re approved for a loan, it helps you to understand whether you’re likely to be approved and the loan terms you may qualify for. If you decide you want to pursue an offer you’re prequalified for, you’ll still need to submit a formal application directly with the lender — that will then make a hard inquiry into your credit, which can affect your credit scores.
You’ll typically provide some basic information:
- How much you want to borrow
- How you’ll use the money
- Your annual income
- Your employment status
- The last four digits of your Social Security number
You can also search loan options without getting prequalified.
How to Apply for a Personal Loan
Whenever you ask a lender for any kind of credit, you’ll have to go through the application process. However, before you submit a personal loan application, it’s important to review your credit report and your credit score, so you’ll understand what lenders might see when they pull your credit report and scores. Remember, checking your own credit report never affects your credit scores, so you can check as often as you need.
Once you’ve reviewed your credit and taken any necessary steps based on what you see, you can apply for a personal loan through any financial institution such as a bank, credit union or online lender. Every lender you apply to will check your credit report and scores.
Lenders will usually consider your credit scores when reviewing your application, and a higher score generally qualifies you for better interest rates and loan terms on any loans you seek. The lender will also likely look at your debt-to-income ratio (DTI), a number that compares the total amount you owe every month with the total amount you earn. To find your DTI, tally up your recurring monthly debt (including credit cards, mortgage, auto loan, student loan, etc.), and divide by your total gross monthly income (what you earn before taxes, withholdings and expenses). You’ll get a decimal result that you convert into a percentage to arrive at your DTI. Lenders like to see DTIs under 36%, but many may provide loans to borrowers with higher ratios.
A personal loan to pay off debt
Taking out a personal loan can also be a way to consolidate debt. This is the idea of putting all your debts together. If you have several different debts and find it hard to keep track of them, combining them into a personal loan can make it easier to focus on sending out just one payment.
You might also be able to get a lower interest rate if you consolidate debt with a personal loan. If you have credit card debt on a few different cards that have a high interest rate, you could get an installment loan to pay off the credit card debt. Instead of paying off several debts with high interest rates, you can work toward paying off one personal loan to pay less overall.
To get a deeper dive into how installment loans work, consider these two scenarios.
1. Using a personal loan to get back on track
Sue’s daughter recently broke her leg. While her daughter’s feeling much better, the incident left Sue with a few extra medical bills she wasn’t expecting.
For this reason, Sue is looking for help to get the medical bills paid. She decides to see if a personal loan might be the solution. After researching how to apply for a personal loan, Sue learns she can take one out through a bank or online lender.
Since she doesn’t need collateral for this type of loan, Sue feels comfortable taking out a loan for $5,000 with an 8% interest rate. By taking out a personal loan, Sue can be better able to handle this unexpected expense without it being a huge financial blow.
2. Using a personal loan to consolidate debt
Jack had very little savings when he started his food truck business. To pay for supplies, he used his credit cards. He now has balances of $5,000 on two cards, and one card with a balance of $10,000. That’s $20,000 of debt that needs to be paid off.
Jack researches his options and finds out he can get a $20,000 personal loan to pay off his debt. Jack’s credit cards have high interest rates, ranging from 10% to 20% on the balances. Instead of paying hundreds of dollars on interest, he can save by putting the amounts together in a personal loan to focus on paying off the lump sum of $20,000. And since his loan has an interest rate of just 8%, this lowers the amount he’ll pay overall on the debt.
What Is a Personal Loan Used For?
“Personal loans can be used for debt consolidation, home improvement, auto expenses, medical expenses, credit card payoff, small businesses, large purchases or anything else that life may throw at you,” says Bill Parker, CEO of Rocket Loans.
However, the most common personal loan uses are to consolidate high-interest credit card debt. Often when you take out a personal loan, you’re able to lower your interest rate, make one monthly fixed payment and save on interest by paying your debt off sooner.
7. Gather your documents and formally apply
Once you’ve settled on a loan offer, you’ll need to formally apply through the lender. This requires a hard credit check, which will impact your credit score, so it’s good to file formal applications within a brief period.
However, hard credit inquiries aren’t necessarily a bad thing. A hard credit inquiry only lasts on your credit report for two years, and it will only affect your credit score for one year, typically. Still, it’s best to do your research and see if you prequalify for a loan to avoid unnecessary hard inquiries.
Once the lender has all of the information and documents they need to make a decision, your loan will typically be approved or denied on the same day you apply.
What do I need to get a personal loan?
You’ll need to provide documents and information that verify your identity, income and address. Examples include a driver’s license, valid Social Security number, pay stubs, bank statements and tax returns. Proof of address may include a utility bill, lease agreement or voter registration card, for example.
Still have questions?
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Factors that will affect your interest rate
Personal loan qualification requirements vary based on the lender, but there are a few criteria that many lenders look at to determine your interest rate offer.
- Your credit score: Good credit can make it easier to qualify for a personal loan at a lower interest rate. Lenders will review your score and your credit history for adverse marks, like late payments or delinquent and defaulted accounts.
- Debt-to-income (DTI) ratio: Your DTI ratio is the amount of your monthly debt divided by your monthly gross income. Generally, a low DTI ratio is a signal to lenders that you can manage monthly payments on a new personal loan.
- Loan term: Generally, loans with shorter repayment terms offer lower interest rates. A longer repayment term typically means a higher interest rate.
- Co-signer: If you don’t meet the lender’s qualification requirements, having a trusted family member or friend in good financial health be your co-signer can increase your chances of approval — potentially at a better interest rate.
If you have a low credit score and a high DTI ratio and don’t have a willing co-signer with good credit and stable income, you won’t be eligible for the lowest personal loan rates. However, a strong credit score and a low DTI ratio will attract the most competitive rates.
Are Personal Loans Secured?
Personal loans are typically not secured. This means that you don’t need collateral such as your house or car to secure the loan. Instead, you receive the loan based on your financial history, including your Fico score, your income, and any other lender requirements you must meet.