A personal loan can be an excellent tool to finance substantial expenditures, such as home improvements or a wedding, and it’s also a practical approach to debt consolidation.
However, it’s important to remember that not every loan is alike. Comparing a variety of interest rates, origination fees, loan durations and loan sums can rapidly make the process of loan shopping daunting.
Fortunately, it doesn’t have to be this way. Our comprehensive 8-step guide simplifies the entire procedure of obtaining a personal loan, from the initial research stage, through pre-qualification and finally to securing approval.
What Information You’ll Need to Apply for a Loan
Prior to initiating your personal loan application, assemble a few essential documents. Whether it’s an online lender, a bank, or a credit union, no financial institution will approve a loan without proper paperwork:
Identification: You’ll require some form of identification, which could be your driver’s license (or state ID), passport, or Social Security card. Income Verification: Lenders need assurance that you are capable of making your monthly repayments on time. Typically, income verification can be provided via pay stubs, tax returns, or even bank statements if you are paid via direct deposit. Residential Proof: You can validate your residential address by providing a lease agreement or a utility bill that displays your name and address. Employer Details: Be ready with your employer’s contact number, as some lenders may need to confirm your employment status.
While you’ll provide these documents, lenders will also conduct a hard credit inquiry, meaning they will review your entire credit history while making their decision. We’ll discuss more on the topics of credit score and credit history, and the distinction between hard and soft inquiries, in the sections below.
How to Get a Personal Loan: 7 Easy Steps
1. Consider Alternatives
First and foremost, ensure that a personal loan is indeed the right choice for you. Although these loans often carry lower APRs than credit cards, the interest rate can still be relatively high, and incurring unnecessary debt can be hazardous.
Consider what you aim to finance with your loan. If you intend to cover expenses for a wedding, holiday, or car purchase, proceed with caution. It’s generally more prudent to save up for discretionary expenses like vacations upfront, and specialized loans such as auto or boat loans usually offer better rates for specific purchases like cars and boats.
As a rule of thumb, we advocate personal loans for three main uses:
Investments: Acquiring a loan for a home makeover or repair can pay off in the long run, as these enhancements often add value to your property. Similarly, if a small business loan is out of reach for your new venture, a personal loan can serve as an alternative method to invest in your future.
Emergencies: If your emergency savings fund falls short, a personal loan can be a viable solution for handling medical costs, vehicle repairs, and other unforeseen expenses. While it’s preferable to have these funds saved in advance, if you’ve had difficulty establishing a substantial savings account, personal loans can be a good backup plan.
Debt Consolidation: Instead of transferring your debt onto a single credit card, which typically carries a high-interest rate, contemplate paying off all your credit card debts with a debt consolidation loan. This approach will simplify your repayments, eliminating the need to keep track of multiple due dates, and debt consolidation loans generally come with lower APRs than credit cards. Be aware, though, that unlike credit cards, where you can opt for a minimum payment, monthly payments for debt consolidation loans are fixed. You are obligated to make the full payment each month, or risk default.
2. Review Your Finances
Personal loans represent a substantial obligation. They involve monthly repayments for a specified period, similar to car or mortgage payments. Failing to meet these payments can lead to severe drops in your credit score, accrue late fees, and eventually, lenders may hand your loan over to collections. They could even potentially garnish your wages and impose a lien on your assets.
Before proceeding, sit down and carefully evaluate your monthly budget to determine what monthly installment you can comfortably handle. Establish a maximum amount based on your income and expenses, and reject any loan offer that demands a monthly payment surpassing this limit.
Moreover, bear in mind that many lenders impose origination fees, which can sometimes be labeled as “processing fees” or “closing costs,” depending on the lender and the loan type. If you decide to accept a loan that includes such a fee, ensure you have the necessary funds to cover this cost at the time of signing. Remember, this is an expense that, similar to interest, will not be recoverable.
3. Check Your Credit Score
Credit scores significantly influence the loan approval procedure. If you have a good or excellent credit score (good: 690 to 719; excellent: 720+), you’ll find a broad selection of loan options. However, if your credit score falls within the fair to poor range (fair: 630 to 689; poor: 300 to 629), or you lack sufficient credit history to generate a score, securing a loan might prove more challenging.
That said, it’s not an impossible task. Some lenders offer unsecured personal loans to borrowers with poor credit, but be prepared for higher-than-average APRs (up to 36%) and less favorable loan terms. These lenders might also charge larger fees to mitigate the risk associated with such investments.
If you need funds immediately, for instance, for a medical procedure or emergency home repairs, proceed with a loan from a lender willing to work with poor credit. However, if you can afford to wait a year or two (perhaps by delaying a vacation or a home renovation project), it would be beneficial to spend this time improving your credit score before applying for a loan.
4. Compare Lenders
The loan market is teeming with online lenders, banks, and credit unions, all vying for your patronage. While this competition is beneficial, it can also make the decision-making process rather daunting. To simplify your search, we suggest relying on authoritative compilations of the best installment loans (we’re understandably biased towards our own). Some websites also provide a personal loan calculator to assist in your comparisons.
But what factors should you focus on when comparing? We advise examining personal loan rates (APRs), minimum credit score requirements, the flexibility of loan term and amount, various fees (such as origination, late payment, and prepayment), the speed of funding, and any unique features, such as rewards for timely payments or protection during unemployment.
5. Get Pre-Qualified
When you apply for a loan, the lender performs a hard credit inquiry, which involves acquiring your credit report from the major credit bureaus. Each hard inquiry can negatively impact your credit score, making it more challenging to explore options with multiple lenders.
Fortunately, some online lenders, such as HappyQuickLoan.com, currently offer pre-qualification for loans. This involves a soft credit inquiry, which doesn’t affect your credit score yet provides the lender with sufficient information to propose an interest rate. You’ll need to supply basic information such as your name, birth date, and income. Additionally, many lenders may inquire about the purpose of your loan application.
6. Review the Loan Details
If you successfully pre-qualify for a loan, make sure to meticulously read the fine print before proceeding. Scrutinize the documentation for details on fees such as origination, late payment, and prepayment. Verify the monthly payment amount, make certain that the loan terms and amount are satisfactory, and compare the APR with other offers.
7. Complete the Application
Once you’ve identified the most suitable loan, proceed with the process. Keep in mind that if you are pre-qualified, the offer is likely time-sensitive, so act promptly to secure the discussed rates.
Lenders like HappyQuickLoan.com can disburse loans within one or two business days, and some even offer same-day funding. To ensure this process is efficient, double-check that you’ve provided all the necessary bank information, and be ready to supply any additional documentation as required.