A personal loan is a good funding option if you need easy cash to meet your financial needs.
What can I use a personal loan for?
You can use a personal loan for;
- Debt consolidation
- Major or minor home renovations
- Starting a small business
- Paying for tuition fees among others
Steps to getting a personal loan
There are many lenders that offer personal loans, both online and in-store. You can apply for these loans through banks, credit unions, or alternative lenders. The lenders follow the same process for approving the loan. Below, we have discussed important steps to follow when applying for a personal loan. Most lenders allow borrowers to prequalify for the loans.
The main requirements for personal loans
It can be your driver’s license, passport, or social security card.
Proof of income
This can be in form of your bank statements, fixed tax returns, or a recent copy of your pay stub)
It may be the manager’s name, company name, or phone contact
Proof of residence
Usually in form of utility bills, lease agreements, or home address
8 steps to getting a personal loan
People apply for personal loans due to various reasons. It can be a medical bill, unexpected car repairs, or any other urgent financial issue. If a personal loan is a good option for your needs, here are important steps to follow when applying;
1. Run the numbers
Applying for a loan that you can’t afford to pay is something you wouldn’t want. Lenders use different criteria to determine whether you qualify for a loan or not. But don’t wait for the lender to do this. It is also wise if you run your numbers to determine whether the loan is worth taking out.
How to run your numbers
First of all, know how much money you need at the moment. When doing this, remember that some lenders also require an origination fee. This fee is usually deducted from the loan amount. Ensure that what you remain with after the fee deduction is enough to cover your expenses.
The next step is to calculate the total cost of the loan. You can do this using a personal loan calculator. You can use the calculator to know how much money you will be paying towards the loan every month. Doing this may not be easy if you are not aware of the interest rate or loan term. So for a start, what you can do is play around with numbers.
Before applying, confirm whether there is an origination fee and confirm how much it will cost you. Know how much money you will remain with after the deductions of this fee. You also should know whether you can afford the monthly payments.
A personal loan calculator will help determine whether you can afford the payments. Ensure to make maximum use of it.
2. Check your credit score
Usually, personal loan lenders perform a credit check. This gives them an idea of whether you are in a position to repay the debt. Some online lenders look beyond your credit score when issuing loans. For instance, they may also look into your employment history and level of income. But still, these lenders may also want to know where you stand in terms of credit score.
What are the minimum credit score requirements for personal loans?
To qualify for affordable personal loans, one of the requirements is to have fair credit. Having excellent credit will increase your chances of getting a personal loan. You are also likely to get the loan at the best rates.
If you have a less than stellar credit score, here is what you can do;
- Get copies of your credit reports from the major credit reporting agencies. Consumers can receive these copies for free once every year. You can get these copies from the bureaus’ websites. You can also get a copy from annualcreditreport.com.
- Confirm if there are any errors made. If you get a mistake from any of your credit reports, contact the agency and have the errors corrected.
- If you have a bad credit score due to poor financial decisions, it is still possible to get a loan. However, expect to spend a lot of interest rate and fee accompanying the loan. The best alternative is to increase your score before you apply for the loan.
With a good credit score, there will be a high chance of qualifying for affordable loans. The opposite applies when you have a bad credit score.
Before you apply for a personal loan, ensure that you check your credit history. If you have a bad credit score, take steps to improve the score first. And then apply for the loan.
3. Consider your options
Having bad credit won’t disqualify you from getting a personal loan. But to get better rates on the loan, you might require a cosigner. However, some lenders don’t allow co-signers. Even if they did, you might not find a person who is willing to cosign for you. If this happens, the best option to consider is a secured personal loan. It is easier to qualify for this type of loan compared to the unsecured option.
So what are secured loans?
Secured loans are a type of personal loan that requires collateral. This can be your home, vehicle, savings account, or an expensive piece of jewelry. Issuing collateral increases your chances of qualifying for the loan. It also helps you get better terms on the loan. If you don’t pay the debt on time, your lender has the right to repossess your asset and even sell it to recover the money.
Where to apply for a personal loan
Banks, credit unions, and alternative lenders all offer personal loans. It is the requirements that vary among these lenders. For instance, it is difficult to qualify for a bank loan if your credit score isn’t good enough.
But online lenders are different. Most of these lenders specialize in offering bad credit loans. Credit unions on the other hand offer payday loan alternatives. These are a cheaper option than the normal payday loans.
At times, you may require a personal loan but do not meet the qualification requirements. In this case, having a co-signer can increase your chances of getting approved.
If you feel that the lender won’t accept your application, don’t despair. You might still qualify for a loan with bad credit. But your interest rate in this case will be higher. You can also request your friend or family member to be your cosigner.
4. Choose the best loan for your needs
- Confirm your credit score and
- Considering the options available,
The next step is to determine the best loan option depending on your needs. There are some loan options that you can for specific needs. Some of these loans include auto loans and mortgages. But there are also loan types that don’t have any restrictions when it comes to usage.
It is important to ensure that you work with a lender that can lend you money without any restrictions on usage. You can use a personal loan for different purposes. The main ones include;
The majority of people who apply for personal loans use the money for debt consolidation. This involves applying for a new loan to pay off all your existing debts. With debt consolidation, you will only make one payment every month. The interest rate is also likely to reduce.
Credit card refinancing
Some companies offer loans to consumers who want to reduce their credit card debts. What these companies offer are personal loans. Why? Because personal loans have a lower interest rate than credit cards. They can be a good loan option to pay off your credit card debts and have enough time to repay the loan.
Home improvement loans are a good option for large renovation projects. The loans are a perfect alternative to a home equity loan that requires your home as security.
Most medical issues come unexpectedly. This is why personal loans can be a good option in such a case. You can use the loan to pay your medical expenses. Personal loans require fixed installments. This gives you enough time to repay the loan.
You can also apply for a personal loan for emergencies. This can be unexpected car repairs or the purchase of an important home appliance.
Vacations and weddings can at times be expensive. This is the reason why many people go for personal loans for these expenses. You can then repay the loan over several years. This is one feature of personal loans that makes them very popular.
Always work with a lender that is willing to offer a loan based on your specific needs.
Compare options from different lenders. Then apply for a personal loan from a lender that is ideal for your borrowing needs.
5. Shop around to get the best rates
Never settle for the first loan offer that comes your way. Instead, take your time and compare options to get the best rates. Start by comparing different lenders followed by the loan types.
You can apply for a personal loan in a bank or from an alternative lender. Credit unions also offer these loans. If you have had a long relationship with your bank, this can be the best place to start. If your account is in good standing, it is likely that the bank will approve your loan request.
Know whether you prequalify
When you apply for a loan online, most lenders will allow you to prequalify. Only a soft credit check is performed which will not affect your credit score in any way. This can also be a perfect way to compare options without damaging your credit report.
If a lender does not have a prequalification process, then he might perform a credit check. To reduce the damage of hard checks, it is best if you take a few days before applying for a loan from another lender. Usually, too many credit inquiries done at the same time can damage your credit score.
Don’t apply for the first loan option you come across no matter how attractive it may be. Compare all the options you have and even prequalify for the loans before applying.
Take your time to shop around and compare the different options available. Check how much interest rate and fees each of the lenders charge. This is actually the best way to find a personal loan with competitive rates.
6. Select a lender and apply for the loan
It is now time to choose a lender who offers a personal loan that can meet your needs. Then start applying for the loan.
Some lenders allow you to complete and submit the application form online. Others need part of the application to be completed in one of their branches.
The information required during the application also varies depending on the lender. The main requirements include;
- You must be at least 18 years old
- You must have a reliable source of income
- You must provide your full name, contact information, and address
- You must be a citizen or permanent resident of the United States
You should also specify how much money you need. Before applying, you should know important things like;
- The amount of money you qualify for
Also, go through the terms and conditions of the loan. Ensure that there are no hidden charges.
The qualification requirements vary from one lender to another. When you work with an alternative lender, the entire application will take place online.
Ensure that you provide all the details required by the lender. This will increase your chances of qualifying for a personal loan.
7. Gather all the necessary documents
You might also need to share some documents with the lender during the application. Some of these documents include;
- A copy of your driver’s license
- A copy of your recent pay stub
You can get details on how to upload these documents on the lender’s website. Note that the sooner you provide these documents the faster the loan processing will be.
Ensure to provide all the documents required by the lender when applying for a personal loan
Gather important documents like your driver’s license, pay stubs, and W-2s. Then start the application process.
8. Accept the loan request/start repaying
After getting approved, you need to provide the documents required. After this, you have to sign the loan contract. Once done, you can receive the loan within one week. Online lenders take as little as one business day to approve the funds.
After getting the money you need, you should start repaying the loan sooner than later. You can authorize the lender to automatically deduct the money from your account. There are lenders that offer interest rate discounts for automatic payments.
You also should think of how to repay the money every month. Generally, personal loans are more affordable than credit cards. But you can even save more when it comes to interest by paying the debt early.
It is possible to apply and qualify for a personal loan within one or two business days. It depends on how long the lender takes to review the application and approve the funds. Once approved, start finding ways to repay the debt.
Come up with a workable plan on how to pay off the personal loan debt. Remember that paying off the debt faster can save you a lot of interest.
Factors affecting personal loans interest rates
Lenders have varied requirements for personal loans. However, there are several factors that every lender looks at to determine the loan rate. These include the following
With a good credit score, your chances of qualifying for a personal loan are high. In fact, you can even get the loan at a reduced rate compared to applicants with a bad credit score. Lenders review the applicant’s credit score to determine which interest rate to give. They consider things like late payment and whether there are loans that you defaulted on.
Debt to income ratio
This is how much money you spend towards paying for loans every month divided by your monthly income. If your DTI ratio is low, it means that you can comfortably repay the loan.
Loans with a short repayment term have a lower interest rate. But when the loan term is long, the interest rate will be higher.
If you are looking for a personal loan and don’t meet the requirements, some lenders may need you to have a cosigner. Having a cosigner will increase your chances of qualifying. It also means that you will get the loan at a better rate.
In short, you are likely to get a higher rate if you;
- Have a high debt-to-income ratio
But if you have a high credit score, low DTI, and a cosigner, you can qualify for the most affordable rates out there.
Is it possible to prequalify for the loan?
Yes, there are lenders who allow applicants to prequalify for the loans. It is only a soft credit check that will be performed in this case. This will not have an impact on your credit score.
To confirm whether you prequalify, there is a questionnaire that you first have to fill out. Here, you provide details like
Annual gross income
- Why you are applying for the loan
There might also be other additional questions in the questionnaire depending on the lender. During prequalification, you do not need to attach any documents. The lender will only need supporting documents if the application moves forward.
How to speed up the process of getting a personal loan
It does not matter what you are applying for a personal loan for. By qualifying for a personal loan, you can deal with all your financial challenges. If you need the money fast, here are a few steps to take.
Check your credit score
This is one important step that you have to take before applying for a personal loan. You first should know your credit score before starting your search. If you find any errors, have them corrected as soon as possible. This is one of the simple ways to increase your chances of approval.
Pay off your outstanding debts
If you have outstanding debts, try as much as possible to pay them off before applying. But this will only work if you don’t need the money immediately. Reducing your debt burden can increase your credit score. This translates to getting a personal loan at affordable rates.
When looking for a personal loan, start with your local
Start the search from your local bank
Bank or credit union. These institutions can approve the loan if you have a long and positive relationship with them. They also offer loans at affordable rates.
Consider an online lender
Online lenders can approve the funds within 24 hours. These lenders also have less stringent requirements. Besides, you can get approved even with a bad credit score.
Pick the money in person
Confirm whether the lender has branches near you. Then ask if you can collect the money in person. This will help you get the money fast.
Finding personal loans with the best interest rates
We now hope that you clearly understand how payday loans work. But before applying, it is always important to compare options from different lenders. This is one of the best ways to get a personal loan with the lowest interest rate. It will also make it easier to find the exact type of loan you need depending on your financial needs.
I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go. I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.