People get personal loans for a whole variety of reasons, from consolidating high-interest debt, buying a new appliance or paying for a vacation. Whatever your reason, as long as you have a good plan in place for repayment and you’re not creating more hardship for your finances, personal loans can be effective tools.
In fact, according to a TransUnion forecast report, it’s expected that 19.3 million Americans will take out an unsecured personal loan in 2023.
The key is choosing a personal loan that has favorable terms and a reasonable interest rate so that your cost of borrowing isn’t higher than it should be. Of course, your personal loan eligibility will depend on your finances and credit situation.
If you think you’re ready to apply for a personal loan, take a look at this step-by-step process so you know what to expect.
[Read: Best Personal Loans.]
1. Do a Self-assessment.
Before diving in, you need to figure out if a personal loan is a good move for you. Some things to consider:
— Why do you need the loan?
— How much are you looking to borrow?
— How much of a monthly payment can your budget handle?
— Where do you stand credit-wise?
Your credit score is actually one of the most important factors that will determine if you qualify and what your interest rate will be, so check that first. You can get your credit reports for free via annualcreditreport.com, and free credit scores are available from various sources nowadays.
“With all the online services now, if you have a good credit rating, you can get a loan,” says Michael Sullivan, consultant in personal finance at Take Charge America, a nonprofit credit counseling and debt management agency. “Some advertise that they give a loan with a poor credit rating of at least a 580. But I find that 600 is more commonly a cutoff for most of these,” says Sullivan.
Even if you can get approved with lower scores, it will mean less favorable terms and higher rates. In that case, you might be better off trying to make credit score improvements before taking a personal loan.
If you do have healthy credit, next up is figuring out how much you want to borrow, and how long you want your payoff term to be. You can use an online loan calculator to help get a sense of what your monthly payments might be at different term lengths. Keep in mind that the longer the loan, the more you’ll pay in interest in the long run.
2. Research Lenders.
Once you know where you stand, you can start doing some personal loan research to see which ones are a strong match for you based on your needs and financial status. “Anyone can get a personal loan, but the requirements may vary depending on the lender,” says Vanessa N. Martinez, a wealth management professional and the CEO and Founder of Em-Powered Network, a holistic and community-based approach to helping women with their finances.
Personal Loan Eligibility
The most common factors that lenders consider is your good credit score, steady employment and an acceptable debt-to-income ratio, says Martinez. “Some lenders may also require a minimum age, citizenship or residency status, and a valid ID,” she added.
In most cases, lenders share general information about personal loan eligibility requirements right on their websites, along with minimum and maximum loan amounts, term options and an annual percentage rate, or APR, range. Some are more transparent than others, so you may have to do some digging. Just note that you probably won’t get the full picture until you request a quote or apply.
If you know you don’t meet basic eligibility on your own, many loans give you the option to apply with a co-signer. “Finding a co-signer with good credit is a great thing for you as a borrower, but if you are asked to be the co-signer, just know you’re putting your credit rating at risk for someone,” says Sullivan.
Types of Personal Loan Lenders
— Banks and credit unions: If you have a banking or credit union relationship, you might check into their personal loan offerings.
— Online lenders: These companies typically offer a fully digital application process and sometimes a faster turnaround.
— Peer-to-peer lenders: Using a lending platform, you can borrow directly from an individual investor. Loan structures are generally the same as other lenders.
As you search online for personal loans, do some additional sleuthing if it’s an unfamiliar company. You can start by searching the Better Business Bureau, Trustpilot and the Consumer Financial Protection Bureau to see what customers are saying about them.
[Read: Best Debt Consolidation Loans.]
3. Compare Quotes.
Whether you’ve narrowed down your lender options on your own, or you find a website to do it for you, it’s important to get at least a few customized quotes to compare. If a lender offers a preapproval without a hard credit check
, take advantage. Otherwise, as long as you’re reasonably sure that you meet the lender’s personal loan requirements, go ahead and request a quote.
When you have a few quotes in hand, line them up to determine which one is the best for you. Don’t just look at the interest rates, though. Instead, look at the APR since it’s inclusive of all fees, says Sullivan. Just be sure to watch out for extraneous fees that might not be included, such as late fees or administrative fees, which Sullivan says may be more common with online lenders.
Other factors to consider include the lender’s reputation, how long it takes to get funding and if you prefer a digital or in-person experience.
4. Select a Lender and Start the Application.
Once you’ve selected your lender, it’s time to apply. Start by gathering your documentation before you begin the application process — whether online, over the phone or in person.
Common documents you may need include:
— Photo ID, such as a driver’s license or passport.
— Proof of address, such as a utility bill, mortgage statement or lease agreement.
— Proof of employment and/or income, such as a pay stub, W-2, tax return or bank statement.
With your documents in front of you, the application should be straightforward. Once you submit, things should move fairly quickly depending on the lender and the amount you’re borrowing. “Approval for online is usually no more than maybe three days,” says Sullivan. In fact, some lenders are able to offer approvals in minutes. “In person, you might expect a longer application and longer approval,” Sullivan adds.
[Read: Best 0% APR Credit Cards.]
5. Complete the Loan and Get Funded.
Once you’ve been approved, look over the final loan agreement carefully to make sure you understand your repayment obligations. Once you agree to the loan terms and sign, you’ll have your money soon after.
“The lender will typically deposit the funds directly into the bank account on file no longer than a week after. Some loans are same-day and others can take 30 to 45 days to complete the process,” says Martinez.
6. Begin Repayment.
Soon after disbursement, you’ll receive your first bill and will be expected to begin making fixed payments for the full loan term. With most loans, you can pay it off sooner with no prepayment penalty, which will save you some money in interest.
Making consistent, on-time payments is important, not only to avoid late fees, but to protect your credit health. Many personal loans offer you the option to set up automatic payments, which can help you avoid forgetting to pay.
Is a Personal Loan a Good Idea?
If you evaluate your budget, research your lenders and make a plan to repay, a personal loan may be a smarter financial decision than other borrowing options, such as a credit card. Just be sure a personal loan is the best option for you before jumping right in.
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How to Get a Personal Loan originally appeared on usnews.com
