Applying for a personal loan can be simple if you understand the process. This guide walks you through every step, from checking your credit score and calculating your loan needs to comparing lenders and submitting an application. Follow these steps to secure a loan that meets your financial goals.
Editor
Zarina S
Update 13.01.2025
Getting a personal loan can initially seem complicated, but it’s easy. Many people in the US are turning to personal loans to manage their debt. In fact, according to Experian, personal loan debt grew 6.3% in 2023 to $19.4 billion. This is mainly because people are consolidating high-interest credit card debt, which can have interest rates of 20% or more. They can simplify their finances and pay less by choosing personal loans with lower fixed rates. Before you apply, you need to know what to expect, including the risks and fees, to make the process go smoothly.
Personal Loans
Personal loans are a popular and flexible way to borrow money, for many uses. Whether you need to consolidate debt, fund a big purchase, or cover unexpected expenses, a personal loan can be a good option. With an unsecured personal loan you can borrow for almost anything, that’s the flexibility many people want.
Personal Loans Features
Terms. Personal loans have terms from 1 to 7 years. The term depends on the amount borrowed and the lender’s policy. You can borrow from $1,000 to $100,000. Shorter terms have higher monthly payments but lower total interest, longer terms have lower monthly payments but higher total interest over the life of the loan.
Rates. Interest rates for personal loans are wide-ranging. As of 2024, the average rate for a 2-year personal loan was 12.33% with rates from 4.99% to 36%. The rate you get depends on many factors including your credit score. People with excellent credit can get rates as low as 10.73% and those with poor credit can get rates starting at 28.50% or higher.
Collateral. Personal loans are usually unsecured, meaning no collateral is required. However, in cases where a borrower has a very low credit score (below 500), lenders may require collateral or a co-signer to approve the loan. Collateral can be assets like property or a vehicle that the lender can repossess if the loan is not repaid.
Credit scores. Your credit score is a big factor in whether you qualify for a personal loan and the rate you’ll get. Lenders offer the best rates to those with excellent credit scores (720 and above). For those with lower scores, the loan terms will be less favorable, with higher rates and stricter conditions.
Speed. The application process for personal loans is fast, many lenders offer online applications. Once approved, funds can be disbursed in a few days, sometimes even 24 hours, depending on the lender and the loan amount. This speed of disbursement makes personal loans a good option for those who need funds urgently.
Personal Loans Uses
Consolidating high-interest credit cards. Many people use personal loans to consolidate high-interest credit card debt into one monthly payment. This can help lower total interest by getting a loan with a lower interest rate than most credit cards.
Home repairs and renovations. Personal loans are a good option to fund home repairs or renovations. Whether you’re fixing a leaky roof or updating your kitchen, a personal loan gives you the flexibility to make improvements without using your home as collateral.
Emergency funds. In times of financial emergencies like unexpected medical bills or car repairs, personal loans can give you quick access to funds to cover urgent expenses and prevent further financial strain.
Vacations. If you’re planning a dream vacation but don’t have the funds upfront, a personal loan can give you the funds. You can pay for travel expenses in installments instead of all at once.
Wedding expenses. Weddings can be expensive and many couples use personal loans to fund their big day. A personal loan can cover everything from the venue and catering to the dress and photography.
Other big purchases. Personal loans can be used for any big purchase like buying appliances, electronics, or furniture. With a fixed loan term, you can spread the cost of big purchases over time.
Medical bills. When faced with high medical bills that are not covered by insurance, a personal loan can help pay for treatments, surgeries, or medical emergencies. It gives you a way to manage big medical expenses without incurring more debt from high-interest credit cards.
Moving costs. Whether moving within the city or to a new state, a personal loan can cover the costs of hiring movers, renting trucks, or other moving expenses.
Funeral expenses. Personal loans are sometimes used to cover funeral expenses, and to help families manage the financial burden of a loved one’s passing while they’re going through a tough time.
How to Get the Right Personal Loan
Before applying for a personal loan, make sure you get the right one for you. Take time to compare and understand the terms so you can get a loan that fits your financial situation. Consider the loan amount, interest rate, and repayment terms to make the right decision.
How Much to Borrow?
Before applying for a personal loan, know exactly how much you need to borrow. This will give you an estimate of your monthly payments and if the loan fits your budget.
Start by calculating your take-home pay and subtracting your monthly expenses, including rent, utilities, insurance, credit cards, and other regular expenses.
If you have enough left over to cover the loan payments comfortably, you’re good to go. If not, borrow less, extend the loan term, or find other ways to meet your needs.
How Much Can I Borrow?
The amount you can borrow with a personal loan is between $1,000 to $100,000. However, several factors will affect how much you can borrow. Lenders will check your credit history, income and overall financial situation to determine your loan eligibility and the maximum amount they can offer. Loan limits may vary depending on the lender and the state you’re in. So the exact amount you can borrow will depend on these factors, and you may need to meet certain requirements to qualify for higher loan amounts.
Get Your Credit Score
Before applying for a personal loan, make sure to check your credit score as it will affect the terms of the loan such as the interest rate and the amount you can borrow. Knowing your score will help you know what to expect.
You can check your credit score for free using services like Experian or AnnualCreditReport.com. These platforms will give you access to your score without affecting it.
Credit scores are categorized as follows:
Excellent. 720 and above - average interest rate 10.73%-12.50%
Good. 690–719 - average rates 13.50%-15.50%
Fair. 630–689 - average rates 17.80%-19.90%
Poor. Below 630 - average rates 28.50% and up
The higher your score, the lower your interest rate and the more likely you’ll be approved for a loan with better terms. The lower your score, the higher your interest rate or stricter loan terms.
Note! If your credit score is below 500, most lenders will not approve your application. However, some may still offer a loan, but you’ll have stricter terms, higher interest rates, or additional requirements such as collateral.
Research and Compare
Before applying for a personal loan, make sure to compare lenders to find the best one for you. Many lenders provide detailed information about their loan products online, so you can research and compare terms. By gathering all the information, you can create a shortlist of lenders - usually 5 - that offer the best loan terms for your situation.
What to Compare
Interest rates. Compare interest rates across lenders to get the cheapest loan. A lower interest rate means you pay less in the long run. Remember, the best rates are usually for those with excellent credit.
Fees. Some lenders charge fees such as origination fees, late fees, or prepayment penalties. Make sure to find a lender with minimal fees to avoid extra costs. Origination fees will reduce the actual loan amount you’ll get, so make sure to factor this into your loan decision.
Loan amounts. Check the loan amounts lenders offer. Some lenders offer small loans, while others only offer larger amounts. Make sure the lender you choose can meet your specific needs without offering more than what you need.
Term lengths. Loan term lengths can be very different. Longer terms will lower your monthly payments but may increase the total interest you’ll pay over time. Shorter terms will cost more per month but will save you more in interest. Which one fits your budget and repayment capacity?
Recommended credit. Lenders will list the type of credit they prefer, such as excellent, good, or fair credit. If your credit doesn’t meet the lender’s requirements, consider options for people with similar credit scores, or explore the possibility of having a cosigner or collateral.
Lender reputation. Make sure to research the lender to avoid predatory lending. Check reviews and ratings from other borrowers and complaints filed with the Consumer Financial Protection Bureau (CFPB). Lenders with good customer reviews and reputations will offer better terms.
Pre-Qualify and Compare Offers
To successfully get a personal loan, you need to compare loan offers. Once you pre-qualify for a loan, you’ll get details such as the loan amount you qualify for, estimated interest rate (APR), monthly payments, and loan terms. Comparing these offers will be a smart move to get the best deal.
As you compare loan offers, look at the APR, which is the total cost of borrowing including interest rate and fees. Also, consider the loan term - longer terms will lower your monthly payments but will increase the total interest paid. Some lenders charge origination fees, which will add to the cost of the loan. By considering these, you can choose a loan offer that fits your situation and needs.
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How to Apply for a Personal Loan
After choosing your loan, you’ll be asked to apply to the lender. Whether online or in person, this is where you’ll provide all the necessary information about your financial situation. Be ready to submit required documents such as proof of income or employment verification.
Once you apply, the lender will do a hard credit check to evaluate your creditworthiness. This will slightly drop your credit score, so be mindful of the timing. However, this is a normal process, and a credit check is necessary to determine your final loan terms. The lender will check your credit history to verify the information you provided and to finalize the loan offer.
After reviewing your application and credit history, the lender will send you the final loan offer. The rates and terms in this offer should be close to what you pre-qualified for but may vary depending on the lender’s assessment of your full application. This is where you review the offer carefully and make sure the terms - interest rate, loan amount, and repayment period - fit what you need and expect.
Once you’re happy with the loan offer, you can accept it. At this point, you’ll sign the loan agreement, either electronically or in person depending on how you applied. Make sure to read the agreement carefully, and check the interest rate, fees, repayment schedule, and any penalties before signing.
After acceptance, the lender will process the loan, and you should receive the funds according to their timeline. This can take a few hours to several business days depending on the lender and type of loan you applied for. If you need quick cash, some lenders offer fast personal loans that can be funded within a day or two.
If you’re applying to multiple lenders, do it within 14 days. This way, multiple hard credit inquiries won’t hit your credit score as hard. Credit bureaus treat multiple inquiries within this window as one inquiry, which minimizes the score drop. This gives you the flexibility to compare loan offers without worrying too much about your credit score.
What Do You Need to Apply for a Personal Loan?
Application form. You’ll need to fill out an application form which may include personal information such as your full name, contact information, date of birth, Social Security number, and address history.
Proof of identity. Lenders will ask for two forms of ID to verify your identity. Acceptable documents are birth certificate, passport, driver’s license, or state issued ID.
Employer and income verification. To verify you can repay the loan, you’ll need to provide proof of income such as pay stubs, tax returns, or bank statements. If self-employed, you may need your 1099s or tax returns from the last two years.
Proof of address. You’ll need to confirm your current address with a utility bill, lease agreement or mortgage statement.
Age. Lenders usually require you to be at least 18 years old to apply for a personal loan.
Citizenship or residency status. You may need to verify your citizenship or legal residency in the country where you’re applying. Acceptable documents are passport, permanent resident card or other government-issued ID.
Conclusion
Applying for a personal loan is easy if you’re prepared. Knowing the loan terms, interest rates, and requirements will help you make informed decisions. Comparing offers from multiple lenders will get you the best deal. By preparing the necessary documents in advance and knowing what to expect, you can fast-track the process and increase your chances of approval.
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What if I don’t have the required documents for a personal loan?
If you’re missing the required documents, you may still have options. Lenders may offer alternative verification methods, such as contacting your employer directly or reviewing bank statements to verify income. Some lenders allow you to sync your bank information electronically for income verification. However, missing documents may still result in loan denial, so it’s best to inform the lender as soon as possible and explore options.
What to do if I get denied?
Get a co-signer. A co-signer with good credit will increase your approval chances and get you a higher loan amount. Keep in mind, their credit will be affected if you miss payments.
Consider a secured loan. A secured loan backed by collateral like a car or home reduces the lender’s risk and may increase your approval chances. It may also get you a lower interest rate.
Work on your credit score. Paying off credit card debt will improve your credit utilization ratio, which can boost your score quickly and get you approved.
Consider a credit card. For smaller expenses, a credit card may be a better option. The application process is similar, and it may be easier to get approved.
How will applying for a personal loan affect my credit score?
When you apply for a personal loan, the lender will do a credit inquiry which will slightly impact your credit score. This effect is usually under 5 points and lasts up to 2 years. But as long as you make your payments on time, your credit score won’t be affected further after the initial inquiry.
