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Applying for a personal loan can be both exciting and nerve-wracking. You may be looking to make a purchase or consolidate your debt. But first, you have to go through the personal loan application process. Luckily, getting a personal loan is a fairly straightforward process.
1. Check your credit score and credit reports
It’s critical to check your credit score before you start to search for a personal loan. Your credit score will, in part, determine whether you are able to secure a loan. Often, it will impact what type of interest rate and repayment terms your lender offers you.
You can check your credit score for free from any number of sources. LendingTree, the parent company of MagnifyMoney, offers a free credit monitoring service that will show you your VantageScore. With some banking institutions, you can receive your free credit score by checking your bank or credit card statement.
When you check your score, it’s good to know exactly where you stand. If it turns out that your score is lower than you thought, you can work on some measures to increase your score before applying for a loan. Let’s take a look at the range of credit scores you might have and what those numbers mean. Here are the FICO score ranges:
- 800-850: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 300-579: Very poor
Typically, most lenders require that you have a minimum credit score to be approved for a loan. But different lenders set their own requirements. The higher your score, the easier it can be to qualify for a loan.
Although consumers with low scores can still qualify for a loan, you can take extra measures to ensure you are approved for a loan or get favorable terms. You might consider:
- Finding a cosigner: You can request someone you know to cosign your personal loan. If they have a healthy score, they can help you secure the loan or get a better term.
- Pursuing a secured loan: With a secured loan, you put up collateral to reduce the lender’s risk in giving you money. That could make it easier for you to qualify for better terms.
Keep in mind that if your credit score isn’t in the higher tiers, you’ll need to carefully weigh the pros and cons of pursuing a personal loan. Taking on too much debt could potentially impact your credit score, as would being unable to repay your personal loan.
Improving your credit score
Your credit score is reflective of information found on your credit report. Each of the three major credit bureaus — Equifax, TransUnion and Experian — maintain a credit report that outlines your outstanding debts, your payment history and more. If you have a low credit score, requesting your credit report could be your first step to increasing your score and qualifying for more competitive loan terms.
You can request a free copy of your credit reports once every 12 months from each of the credit bureaus by visiting AnnualCreditReport.com. Carefully review your reports and dispute any errors you find.
If there are no errors on your reports but you have a low credit score, you will need to develop healthy financial habits to raise your score over time.
After reviewing your credit reports and credit scores, you can begin researching lenders.
2. Research and compare lenders
Just as credit requirements may vary, different lenders may offer different interest rates and term lengths on their loans. It’s wise to check different lenders to get an idea of which will best meet your needs.
You can find personal loans from banks, credit unions and online lenders. If you’re not sure where to start, you can use MagnifyMoney’s personal loan marketplace. There, you’ll enter your desired loan amount, credit score range and ZIP code before reviewing lenders.
No matter how you seek out lenders, your goal should be to find a lender that offers:
- Reasonable interest rates
- Loan terms that suit your financial needs
- Few limitations on repayment, such as no prepayment penalties
- No or few hidden fees
Just because one offer from a lender looks good doesn’t mean you shouldn’t consider other lenders. You’ll want to choose a few of your favorites. In this next step, you’ll apply for preapprovals to get a better idea of what loan terms each of these lenders will offer you. Use our table below to compare personal loan offers to find the best option for your needs!
Compare Personal Loans
3. Go through the preapproval process
To find out which lender has the best offer, you can get preapproved for a loan through different institutions. When you apply for loan preapproval, you may need the following documents and pieces of information:
- Total amount you want to borrow
- What your purpose for borrowing is
- Your name
- Your home address
- Your total annual income
To get preapproved, you may not need documents such as tax returns to prove your income, but you will need to be prepared to offer these when you officially apply for your loan.
Next, the lender will perform a soft credit check to determine what type of offer it can give you. A soft check is where a bank or company can access your credit report and score, but it doesn’t affect your credit as a hard inquiry would.
After submitting your application, you’ll receive word whether you’re preapproved. Once you have your preapproval offer, you’ll see the loan amount for which you’re preapproved, plus your rate. This amount and rate aren’t a sure thing – it’s just an estimate provided from the lender based on high-level financial information.
When you apply for your loan, the lender will do a more in-depth look at your finances and consider your ability to repay the loan. This could affect the rate and amount for which you qualify. But a preapproval offer allows you to better compare different lenders to determine which is the best fit for you.
In this step, you’ll want to dig into each of the lenders who have preapproved you. Consider checking each lender for the following:
- Poor reviews: If you haven’t already checked customer reviews, now’s the time. Knowing how a lender treats its customers could help you avoid getting stuck with a bad lender for several years.
- Hidden fees: Dig into the fine print with each lender. Keep an eye out for hidden fees.
- Prepayment penalties: If you want to pay off your loan early to get out of debt, that should be a good thing. Having to pay a penalty for not paying the loan for the full length of your term is something you should avoid.
- Pre-computed interest. In a nutshell, this means that you end up paying more interest on the front end of your loan, which could result in you overpaying over the life of your loan term (even if it’s paid off early). This is a common personal loan trap.
4. Finalize your application
When you decide on an offer that works for you and your unique financial situation, you’re ready to finalize your application. Although you’ve already received preapproval, you’ll still need to fill out your official application for final approval.
This typically only requires a few additional steps:
- Proving your identity, such as with a driver’s license or passport
- Verifying your address through a copy of your lease or a utility bill
- Proving that you have steady income through bank statements, an offer letter or contract from your employer
Remember: If you’re not happy with the loan offer you receive, you can always negotiate with your lender. This is a particularly viable option if you’ve already built up a relationship with your bank or local credit union and are seeking a loan from it. Many lenders will have some wiggle room on their offer, especially if you’re able to point to another preapproved loan offer you received with better interest rates or repayment terms. Once an institution has all the details it needs, it should only take a couple of days for it to process its decision, and another week to send you a notification by mail (if applicable). Funds can be available as soon as the next business day.
5. Know what you’re getting into
Regardless of what type of loan you end up selecting, it’s important to read and understand the fine print. No loan is going to be perfect in every way, and weeding through the final loan offer you receive can set you up for future success.
For example, knowing whether your lender takes automatic withdrawals is important information as you build a new monthly budget that includes your loan. It’s also important to fully understand the expected monthly payment on your new personal loan, and whether you can pay off your loan early without penalty.
Applying for a personal loan can be daunting. Taking on debt in any capacity can be a financial risk, and you need to be prepared for the potential consequences. After you receive your loan funds, you should work diligently to pay them back. To do this, you can set up automatic loan payments and regularly pay extra toward your loan when possible to speed up your repayment process.
If your budget doesn’t support additional payments on a consistent schedule, you might consider dedicating yourself to putting any windfall toward your loan. This would include a quarterly bonus, money you receive as birthday or holiday gifts or any other funds you receive that weren’t already included in your annual or monthly budget.
Finally, think about why you took out the loan in the first place. Is there a way to avoid accumulating debt like this in the future? It may make sense to add extra savings into your budget once this loan is paid off to put money toward future big-ticket financial goals. It would also help to avoid taking on additional debt while you work to pay down your existing personal loan.
Taking out a personal loan can be stressful, but the application process doesn’t have to be. Organizing your documents ahead of time, checking your credit score and doing your research on different lenders can help you ensure that you’re getting the best possible loan available for your unique needs and financial circumstances.