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Whether you need to consolidate credit card debt, cover unexpected medical bills or pay for personal events such as a wedding, a personal loan can help.
There are personal loans available to borrowers across the credit spectrum, but with the right steps, you can ensure you get the best loan for your needs and budget. Here are seven steps to guide you through the process.
1. Check Your Credit Score
You don't need a perfect credit score to get approved for a personal loan. In fact, some lenders specialize in working with borrowers with bad credit. However, some of the best personal loan interest rates are reserved for borrowers who have good credit or better—starting with a FICO® Score☉ of 670.
You can check your FICO® Score for free with Experian to get an idea of where you stand. If your score needs some work, check your Experian credit report to understand which factors are impacting your score. Then, take action based on what you find. Some possible ways to improve your credit before applying for a personal loan include the following:
- Pay down credit card balances
- Get caught up on past-due payments
- Avoid applying for new credit unless you need it
- If you find information on your credit report you believe to be inaccurate, you have the right to dispute it with the appropriate credit reporting agencies (Experian, TransUnion and Equifax)
- Register for Experian Boost®ø and get credit for positive rent, utility, phone and streaming payment history.
2. Calculate How Much You Need to Borrow
Understanding how much you need can help ensure that you don't borrow too little or too much. What's more, personal loan companies typically have a range of loan amounts they offer, so knowing what you need can help you weed out lenders that can't meet your needs.
Keep in mind, too, that some lenders charge an origination fee, which is deducted from your loan disbursement. As a result, you may need to borrow a higher amount to account for the fee.
For example, let's say you need to borrow $10,000, and the lender charges a 5% origination fee. Simply divide $10,000 by 0.95 to get roughly $10,527, which is the amount you need to cover the fee and still get a $10,000 loan disbursement.
3. Calculate an Estimated Monthly Payment
Once you know how much you need, research personal loan interest rates to get an estimate of what you might qualify for based on your credit profile. Then, use a personal loan calculator to calculate your monthly payments and total interest charges over the life of the loan.
Running the numbers can help you determine whether you can afford the payments on the amount you want to borrow and give you an idea of the total cost.
4. Get Prequalified With Multiple Lenders
You may be tempted to just apply with the bank or credit union you already have a financial relationship with. But while it can be helpful to have all of your finances under one proverbial roof, you may be able to save more money with a different lender.
The good news is that many of the best personal loans offer prequalification. This allows you to view and compare rate quotes with a soft credit inquiry, which won't impact your credit score. The process typically only takes a few minutes, so try to get prequalified with at least three to five lenders to get a good sample of offers.
5. Compare All Loan Terms
While a personal loan's interest rate is the most important factor to consider, it's also crucial that you consider other loan terms, including:
- Repayment terms: Personal loans may come with terms ranging from one to seven years, but some lenders offer more flexibility than others. A longer repayment term can reduce your monthly payment, but it'll typically also result in a higher interest rate and more total interest charges.
- Fees: Personal loans typically don't come with application fees or prepayment penalties, but some lenders charge origination fees. In some cases, the fee can be as high as 12% of the loan amount. If you have great credit, try to focus on lenders with no origination fees.
- Loan restrictions: You can use a personal loan for just about anything you want, but some lenders have restrictions in place. In most cases, it's reasonable—for example, you often can't use personal loans to pay for secondary education expenses or to buy investments. However, some lenders may only offer loans for debt consolidation or other specific purposes, so make sure your needs align.
- Funding time: Once you're approved, most lenders will fund your loan within a few days. But if your need for cash is urgent, try to find lenders that offer next-day or even same-day funding.
- Discounts: Many lenders offer an interest rate discount if you set up automatic payments, and some offer another one if you have an existing relationship with the financial institution. In many cases, these lenders incorporate that discount into your quote, so make sure that you qualify to get an accurate idea of what you'll be paying.
6. Choose a Lender and Apply
Once you've decided which lender has the best offer, you can typically apply via the lender's website. The process can vary slightly depending on which one you choose, but in general, you'll need to provide the following information:
- Date of birth
- Social Security number
- Contact information
- Desired loan amount and term
- Loan purpose
- Employment and income information
- Housing status and monthly payment
- Driver's license or other government-issued photo ID
You may also need to provide income documentation, such as a pay stub, W-2 form, tax returns or bank statements. The lender will formally review your credit and a hard inquiry will appear on your credit report. This remains on your credit report for two years and may temporarily ding your credit score by a few points for up to a year. After you submit your application, you can often get a decision within seconds, though some lenders may take more time to evaluate your financial and credit profiles.
7. Review the Offer and Accept the Loan
Unlike prequalification, an official loan application typically requires a hard credit check, which can impact your credit score. This deeper dive into your creditworthiness allows the lender to give you a firm offer, which may or may not be the same as the initial quote.
Once you're approved, review the offer and the loan's terms and conditions to make sure it's the right fit. If your terms aren't quite what you expected, you can go back and apply with a different lender. If you're happy with the terms, sign the loan agreement and the lender will disburse the loan funds.
A personal loan can help you build a good credit score. The positive ways that a personal loan can impact your credit score include:
- Payment history: Making loan payments on time and in full until your loan is paid off can improve your credit score.
- Credit mix: If you don't currently have an installment loan, a personal loan will increase the types of credit you manage and could improve your credit score.
- Credit utilization: Paying off credit card debt with a personal loan can lower your credit utilization ratio, which could improve your credit score.
On the other hand, missing a payment, paying late or defaulting on the loan can lower your credit score. Aim to responsibly manage your personal loan so you avoid hurting your credit score. Consider monitoring your credit for free through Experian to see how your loan impacts your credit going forward.
Act fast. Once your loan payment is 30 days late, lenders may report it to credit bureaus. A late payment stays on your credit report for up to seven years and can negatively affect your credit score. You might also have to pay late fees, have your account sent to collections or even face a lawsuit.
If you don't think you can make your next loan payment, reach out to the lender to explain your situation. Your lender may offer one of the following solutions:
- Loan deferment and forbearance are temporary solutions that allow people suffering financial hardship to temporarily pause loan payments. They are typically used for mortgages and student loans, but your lender might be willing to work with you on a personal loan.
- Loan modification adjusts your loan terms to lower your monthly payments. More common with mortgages, loan modification may be an option depending on your lender.
You might look for an alternative to taking out a personal loan if you can't get approved, or if you only receive offers with high rates. A few popular alternatives include:
- Credit card
- Home equity loan or HELOC
- Personal line of credit
- Peer-to-peer loan
- Life insurance policy loan
- Retirement plan loan
- Mortgage refinance
Your creditworthiness and the reason why you want to get a personal loan can also impact which option may be best.
Get Matched With Personal Loans Based on Your Credit Profile
Getting prequalified with multiple lenders can be time-consuming. Fortunately, Experian allows you to get matched with offers from multiple lenders at once based on your Experian credit profile. This service speeds up the process for prequalification and also makes it easier to compare loan options side by side.
Learn More About Personal Loans
- What Is a Personal Loan?
Personal loans can be used for a variety of reasons, but it’s important to consider both benefits and drawbacks before you apply for one.
- What’s a Good Interest Rate on a Personal Loan?
Personal loan interest rates can vary by lender and based on your creditworthiness. Here's what to know about personal loan rates and how to get a good one.
- 5 Personal Loan Fees to Watch Out For
Some lenders charge fees to process personal loans, while others don’t. Find out what these fees are and how to avoid them.
- How Do Personal Loan Interest Rates Work?
Personal loans offer a great deal of flexibility and a range of interest rates for various credit scores. These rates are influenced by a number of factors.
- Do Personal Loans Have Penalty APRs?
Making late payments on your personal loan can lead to late fees, but probably not a penalty APR, which is generally reserved for credit cards.