A personal loan is a sum of money that you repay over time in fixed monthly payments. A personal loan can benefit you whether you have an unexpected expense, need to consolidate credit card debt, or want to make home upgrades. We’ll show you how to compare your possibilities, go over your alternatives, and answer your burning questions. You may accept a loan offer with confidence and acquire the money you need if you understand how to secure a personal loan.
Important Takeaways
- Personal loans can be used for nearly any reason, but you should only apply for one if you desperately need the money and can afford to repay it over time.
- Pre-qualifying for a personal loan usually does not harm your credit. You should go through the process with several lenders to examine the rates, conditions, and costs.
- If you can’t qualify for a personal loan on your own, you might be able to receive one with the help of a co-signer.
- Personal loans are not suitable for everyone. Home equity loans, 401(k) loans, and family loans are among the choices.
How to Apply for a Personal Loan
To obtain a personal loan online, follow these steps:
- Investigate lenders: To narrow down your selections, check lender eligibility requirements, customer reviews, and must-have features.
- Pre-qualify: Many lenders provide pre-qualification, which allows you to acquire an estimate of your interest rate without affecting your credit. 1 To pre-qualify, follow the instructions on the lender’s website and acquire rate estimates from other lenders for comparison.
- Select a loan: Compare APRs and terms from several lenders and choose the best solution for your needs. To prevent paying extra interest, choose the shortest term that corresponds to a monthly payment you can comfortably afford.
- Fill out the application: Apply for the loan in writing, which usually necessitates a severe credit check. To complete the application, you may be required to furnish documents such as recent pay stubs and tax records.
- Sign the following loan documents: Make sure to thoroughly study your loan offer, and keep in mind that your final rate may change from your projected rate. Sign your loan documentation if you agree with the APR and terms.
- Wait for the funds: The majority of lenders will deposit the funds directly into your bank account. This could happen the next business day, or it could take many days.
- Begin repayment: You’ll normally need to begin making monthly payments within 30 days, so make sure you budget for debt repayment and set up autopay to avoid missing payments.
When Should You Take Out a Personal Loan?
To begin with, there are specific instances in which you should not apply for a personal loan. Borrowing is not a good option if you cannot afford to repay the loan or if you do not require the funds. For example, it’s generally not a good idea to use borrowed money to get a good bargain on a costly new television. However, there are other compelling reasons to obtain a personal loan, including:
- A personal loan can help with auto or home repairs if you need to repair your vehicle to commute to work or if you need to pay a contractor to fix your air conditioning in the summer.
- A major purchase that is required: A fancy handbag or a virtual reality headset aren’t necessities, but if your refrigerator or washing machine goes down, a personal loan can help with a replacement.
- Another unexpected expense: Whether you need to travel for a family emergency or take your dog to the vet, a personal loan can help.
- Debt consolidation: If you’re drowning in credit card debt, a personal loan can help you get out sooner. According to the Federal Reserve, the average APR on a personal loan is 11.48%, while the average APR on credit card plans is 20.09%. 2
- Financing a vehicle: Secured auto loans typically have cheaper interest rates and are preferred when purchasing a car. However, if you don’t have a down payment, are purchasing a used automobile from an individual, or the vehicle does not qualify for regular financing, a personal loan may be a viable option.
- Paying for a wedding: While it’s always preferable to save for a wedding or get married on a budget, The Knot reports that the average wedding cost will be $30,000 in 2022. 3 If you need financial assistance, a personal loan may be a suitable option if you can acquire one at a low interest rate. Just remember to plan for repayment.
- Keep in mind that taking out a personal loan entails repaying the amount with interest. You’ll come out ahead if you can develop your funds in a high-interest savings account to prepare for the expenses listed above. Saving and planning for the future, rather than borrowing, allows you to keep more of your money.
What You’ll Need to Apply for a Personal Loan
To be eligible for a personal loan, you should have the following:
- Excellent credit is required to qualify for the best prices. However, some lenders employ alternative underwriting data and are willing to work with clients with bad credit. There are even personal loans that do not require a hard credit check, but these loans have exorbitant interest rates.
- A strong payment history: Lenders search for red flags in your payment history, which accounts for 35% of your credit score. Missed or late payments indicate a problem with debt management and may result in a personal loan denial or a higher interest rate.
- A low debt-to-income ratio: Lenders analyze your debt-to-income ratio to ensure you’re not overextended, which may be computed by dividing your monthly debt payments by your monthly gross income. Most lenders desire a DTI of less than 36%.
- Proof of income: To obtain a personal loan, you must demonstrate that you have a steady and continuous source of income. Some lenders require a certain level of income. You’ll almost certainly be required to supply information about your job as well as papers such as W-2s, pay stubs, and tax returns.
- Aside from your Social Security number, you may be required to provide a copy of your Social Security card or driver’s license as proof of identification and address. You may also be required to show address proof, such as utility bills.
- If you have bad credit, applying with a co-signer may increase your chances of getting approved for a personal loan. A co-signer is a creditworthy friend or family member who assumes loan responsibility. You can also check into secured personal loans that demand collateral and may be easier to qualify for.
Selecting a Personal Loan
Consider the following variables when comparing personal loans:
- Minimum credit score or income criteria: Some lenders may have minimum credit score or income requirements that may reject you.
- Rates and fees: Take into account the interest rate as well as any origination fees. The APR comprises both interest and fees and is represented as a percentage of the loan amount paid each year, making it useful for comparing lenders. You should also be aware of late fees and avoid lenders who impose prepayment penalties. Some personal loans for individuals with great credit are fee-free.
- Customer feedback: Review customer feedback on third-party sites such as Trustpilot, ConsumerAffairs, and the Better Business Bureau. While a few unfavorable reviews are to be expected, frequent complaints about the same issue should raise concerns.
- Funding timeline: Think about how quickly you need the money. Some lenders provide same-day loans, while others may take several days or even weeks to release loan funds.
- Alternatives for people with bad credit: If you want to apply with a co-signer or put up collateral to boost your chances of approval, make sure the lender you choose has such alternatives.
- Discounts: Some lenders may provide relationship discounts, autopay discounts, or other ways to save money. When comparing rates, keep these in mind.
- Payment flexibility: Some lenders are more accommodating than others, allowing you to reschedule your due date if necessary. Take note of these characteristics.
Obtaining a personal loan
Applying for a personal loan is pretty simple, although some lenders have simpler processes than others. Some lenders, for example, may not provide a pre-qualification process. Others may demand that you supply many documents in order to apply formally. You can avoid some problems if you opt for lenders who provide a quick rate quote and use AI to complete your application.
Personal Loan Lender Comparison
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Personal loan alternatives
If a personal loan does not appear to be the best option for you, there are other options to consider.
Home equity loan, or HELOC: These loans and lines of credit allow you to borrow against the equity in your home. They may be easier to qualify for and have lower interest rates than personal loans because they are secured by your house. They do, however, come with closing charges, and you may lose your house if you are unable to repay the loan. It will also take longer to receive your funds. Home equity loans and HELOCs are ideal for homeowners who have a lot of equity and need a substantial loan.
Credit card with 0% introductory APR: Some credit card companies provide 0% APR promotional periods ranging from six to twenty-one months. You’ll need good credit to qualify, but these cards can help you fund a significant purchase or repair while also allowing you to pay off the balance interest-free over time. Simply make the required minimum payments on time and pay off the balance in full before the promotional period expires. Otherwise, you risk being saddled with a high interest rate.
Life insurance policy loan: Life insurance policy loans are accessible only on permanent life insurance policies with sufficient cash value, and they do not require proof of income or a credit check. To avoid a policy lapse, simply make monthly payments. 5
Borrowing against your 401(k) is another option for getting a loan without a credit check, but avoid this choice if you plan to leave your job. In that case, you may have to repay the loan in full to avoid tax consequences.
Crowdfunding: Crowdfunding is an excellent approach to soliciting assistance from family and friends in times of need. It’s especially appropriate for folks who have veterinarian or medical bills because most people understand these financial necessities. There are two options: GoFundMe and CoFund Health. When you are unable to repay a loan, crowdfunding may be an option.
Loans from family members do not require a credit check. Your family member will most likely offer you the loan without interest or at a low interest rate, and you will have more repayment options. If you have a friend or family member who can help, this is often the best option for borrowing money.
How Much Money Can You Borrow on a Personal Loan?
Loan amounts vary per lender, although several provide personal loans of up to $100,000. Some companies may provide personal loans of up to $200,000. However, not everyone will be able to obtain the maximum loan amount.
How Long Does It Take to Process a Personal Loan?
A personal loan may take up to a week to process and another week to distribute funds at a bank or credit union. Online lenders are often faster, providing loan approvals within a few days and sending funds as soon as possible. 7 Some lenders can fund loans as early as the following working day. Review your possibilities for quick loans by visiting the top fast personal loans.
Is it possible to return a personal loan if you do not use it?
You usually cannot return the loan once you have received it. However, if the lender does not levy prepayment penalties, you can repay the loan early and save money on interest.
Does paying off a personal loan improve your credit score?
No, not always. If you have high balances on your other accounts, paying off a personal loan may lower your credit score because an open account with a strong payment history is often better for your credit than a closed account. Paying off a personal loan, on the other hand, may lower your debt-to-income ratio, which may help you be approved for new credit.
