You can use a personal loan for pretty much anything. Start by deciding how much you need, then compare options, get preapproved and complete an application for your chosen lender.
Follow the steps below if you're considering a personal loan. Skip to the frequently asked questions for information on where to get a personal loan, federal regulations and alternatives.
6 steps to getting a personal loan
There are six main steps to complete on your way to getting personal loan funds. It’s important not to rush through them; otherwise, you could end up borrowing more than you can afford to pay back, paying higher fees than necessary or not fully understanding the loan terms.
1. Decide how much you need to borrow
It’s smart to go in with a set dollar amount in mind. Lenders have different minimum and maximum personal loan amounts, typically starting around $1,000 on the low end and capping between $35,000 and $100,000. This helps eliminate lenders that won’t work for your situation.
How much you need to borrow varies based on why you need the funds — you might want a few thousand dollars to cover planned expenses, like a home remodeling project or moving costs. You might want $10,000 as part of a strategy to get out of debt or build credit.
Some people borrow more to cover a wedding, emergency medical expenses or personal projects. If you need less than $1,000, you might be better off opening a personal line of credit.
2. Consider your eligibility for different loan options
Your credit history plays a big role in your options. It’s one of the first things lenders look at when deciding the risk level of lending to you.
Credit score is one of the main factors lenders use to determine the interest rate on a personal loan.
If you have a good credit score, it’s relatively easy to find personal loans with affordable annual percentage rates (APRs). If you have bad credit, expect much higher rates and fewer options. You might have to put something up for collateral, such as your car title.
The average FICO Score as of August 2021 was 716, according to FICO; the average VantageScore in April 2021 was 694, according to VantageScore Solutions. If you check your credit score and see a lower number than you expected, it might be because of your payment history or credit utilization.
Everyone is entitled to a free credit report each year from each of the three reporting bureaus, so take advantage of it. The reports detail any active credit accounts, credit inquiries, collection information and other factors that affect your credit score.
3. Compare lenders on rates and fees
Once you know what type of loan you need, the next step is to research lenders and offers. Some people use an online marketplace, like LendingTree or PersonalLoanPro, to compare rates from multiple lenders.
Interest rates on personal loans start around 3% to 5%. However, you need excellent credit to get the lowest rates. Those with average credit could pay 15% or more in interest. If you have bad credit, you could pay up to 36%. The average personal loan interest rate is between 10% and 11%, according to Bankrate.
In addition to the interest rate, pay attention to the annual percentage rate, which includes not just interest but other fees as well. Many online lenders offer calculators on their websites to help you see repayment amounts.
If you don’t take advantage of an online comparison tool, use a spreadsheet to create your own so you keep track of different offers and choose the most favorable one.
4. Get pre-qualified or preapproved
Pre-qualifying for a loan gives you an idea of how much you can borrow. It generally requires basic information about your income and other personal factors — but not a hard credit check.
Preapproval is a step closer to approval. It's when you get more specific details about loan offers, including how much you can borrow and the cost of borrowing. Applicants must disclose more financial information to get preapproved, such as proof of income. Preapproval also requires a hard credit check.
Preapproval is typically a more advanced step than pre-qualification and requires a hard credit check.
For the pre-qualification and preapproval process, be ready to provide the lender with your:
- Requested loan amount
- The reason you're requesting the loan
- Your total annual income
- Your debt obligations
You can complete the steps to pre-qualify or get preapproved online, over the phone or in person if you're working with a local bank or credit union. The preapproval process may require your Social Security number and a hard credit inquiry, which temporarily lowers your credit score. If you’re applying for preapprovals with multiple lenders, we suggest submitting all applications within the same month to minimize the effect on your credit.
5. Apply for the loan
Once you’re pre-qualified or preapproved, you can formally apply for the loan of your choice. If you haven’t already, get ready to provide documents that prove your identity, income and address, such as:
- A government-issued photo ID
- Proof of address
- Social Security number
- Recent pay stubs
- Recent bank statements
The lender will use this information to confirm your creditworthiness and make a final approval decision. During this time the lender might ask for additional documentation, so be prepared to respond to further requests.
6. Wait for approval, sign and get funded
Depending on the type of lender you choose, you should know if you’re approved within a few hours to a few days. Generally, lenders look at these factors to make their decision:
- Credit score
- Annual income
- Debt-to-income ratio
- Employment history
- Collateral (for a secured loan)
- How you plan to use the money
- Whether you have a creditworthy co-signer (if applicable)
Read over the fine print in the loan agreement carefully before you sign. Lenders are required by federal law to disclose your APR, the total finance charge and the total of all the payments you'll make over the term of your loan. Look for information in the contract about late payment charges and any prepayment penalties.
If you agree to sign for the loan, you should get the money within a week — sometimes as soon as the same day or the next day. Once you receive funds, the repayment process, as agreed upon in your contract, begins.
It's important to follow the terms of the loan and make your payments on time — failure to repay a loan or multiple late payments can negatively affect your credit score in a major way.
If you don’t get approved
You can try again with a different lender. Adding a creditworthy co-signer can help some people with bad credit qualify for unsecured personal loans. You might explore other options, including secured loans and the alternatives below.
Getting a personal loan FAQ
- What are the alternatives to personal loans?
- If getting an unsecured personal loan doesn’t work out, you might consider one of these alternatives:
- Borrowing from friends or family: Keep in mind that the IRS says these types of personal loans must be reported on tax returns and paid back with interest. You might be better off asking for a gift, as long as it doesn't exceed $16,000 (as of publishing).
- Line of credit: A line of credit is similar to a personal loan in both its requirements and its application process. The main difference between the two types of funding: A personal loan is paid out as a lump sum, while a credit limit, like on a credit card, lets an individual borrow up to a certain amount over time.
- Home equity loan/HELOC: If you’re a homeowner, you can use a home equity loan or line of credit to leverage the equity you’ve built up through years of mortgage payments.
- Debt consolidation loan: Debt consolidation companies help you pay off your current debts with a new loan. You then make just one monthly payment.
- Crowdfunding: Online crowdfunding platforms, like GoFundMe and Kickstarter, give you the opportunity to raise funds from people on the internet.
- Payday and title loans: These types of cash advances should be a last resort. Be aware: Many companies targeting folks with “bad credit” charge extremely high APRs — sometimes up to 100% or more. We suggest first exploring payday loan alternatives.
- Other loan options: Depending on your situation, a business loan, 401(k) loan, car loan or peer-to-peer lending might work out.
- Where is the best place to get a personal loan?
- Banks, credit unions, online lenders, peer-lending companies and private lenders all offer personal loans. Read our guide to find the best personal loan company for you.
- What is Regulation Z?
- Regulation Z is the part of the Truth in Lending Act (TILA) that protects consumers when they use consumer credit, like installment loans. It requires lenders to make certain disclosures, including the APR, to loan applicants. The lender must provide these disclosures in writing.
- Is it safe to apply for a personal loan online?
- It’s safe to apply for a personal loan online as long as you go through a reputable company with a secure website. Never give out any important personal information (date of birth, Social Security number, bank account numbers) unless you’re certain you’re working with a legitimate lender. Here are some red flags to look out for:
- Advance payment fees: Reputable companies don’t charge fees before you take out a loan.
- Lack of address: Always verify the company has a physical address.
- Interest rate inflation: An extra interest point and a few more months on your repayment schedule can cost a lot.
- Copycat names: Sometimes, fraudulent online lenders use a logo and font similar to those of a reputable company. This is intended to trick you.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- FICO, “Average U.S. FICO Score at 716, Indicating Improvement in Consumer Credit Behaviors Despite Pandemic.” Accessed Feb. 16, 2022.
- VantageScore Solutions, “Average Naitonal VantageScore Credit Score Continues to Increase to 694; Up Six Points from Early Pandemic Levels.” Accessed Feb. 16, 2022.
- Consumer Financial Protection Bureau, “What is a Truth-in-Lending Disclosure? When do I get to see it?” Accessed Feb. 16, 2022.
- IRS.gov, "Frequently Asked Questions on Gift Taxes." Accessed Feb. 25, 2022.
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