How to Get a Personal Loan in 7 Steps

Understanding how to secure a personal loan can simplify the borrowing process and help you make smarter financial decisions. From assessing your budget and checking your credit score to comparing lenders and applying, these steps will guide you through every stage of the process to find the best loan for your needs.

01.03.2023
1180
21 min.

Personal loans can give you the financial freedom to cover expenses, whether debt consolidation, a big purchase, or an emergency. However, navigating the process can be overwhelming without a clear idea of how to approach it. Knowing the steps from budgeting to choosing the lender will help you make an informed decision that suits your financial goals.

How to Get a Personal Loan in 7 Steps

Step 1. Budget and How Much You Need to Borrow

Before you apply for a personal loan, you need to assess your financial situation to know how much you need to borrow. Start by evaluating your current needs - whether it’s medical bills, high-interest credit cards, or a big purchase. Add up all your expenses and calculate the total amount needed.

Next, consider your repayment capacity. Look at your monthly income and existing debt obligations to see how much you can afford to pay each month. Lenders generally recommend that your total monthly debt payments, including the new loan, should not exceed 30-40% of your monthly income. This will ensure the loan won’t burden you and you can manage the payments. Also, don’t forget to factor in potential future unexpected expenses, so your loan is manageable.

By knowing both your immediate needs and your repayment capacity, you’ll have a better idea of the loan amount that suits your situation without over-extending yourself financially.

Step 2. Check Your Credit Score

Your credit score is a major factor in determining your personal loan eligibility and the interest rates offered by lenders. A higher score means higher chances of approval, lower interest rates and better terms. According to the most recent data from the Federal Reserve, the average personal loan interest rate on two-year loans was 12.33% in 2024, with rates ranging from 4.99% to 36%. Based on Bankatre data, credit scores are classified as:

Excellent - 720 and above - average loan interest rate 10.73%–12.50%

Good - 690-719 - average rates between 13.50%–15.50%

Fair - 630-689 - average rates between 17.80%–19.90%

Poor - below 630 - average rates starting at 28.50% or higher

Note! If you have a credit score below 500 you may still get a personal loan but will face stricter terms like higher interest rates or additional requirements like collateral.

To check your credit score, you should focus on accessing your FICO Score, as it’s the credit score used by 90% of lenders in the US. FICO Scores are calculated based on data from the three major credit bureaus: Experian, Equifax, and TransUnion.

These credit bureaus collect and maintain your credit history including payment records, outstanding debts, and public financial information. You can get your FICO Score directly from the official websites of Experian, Equifax, or TransUnion as they are partnered with FICO to provide the credit score.

If you have time before applying, improve your credit score. A higher score may get you a lower interest rate.

Check your credit report along with your FICO Score so you can identify potential errors that may affect your score and correct them before applying for a personal loan.

All Today 10.02.2025 Personal Loans in the US
All Today 10.02.2025 Personal Loans in the US

Compare best personal loans for you today! Apply for a loan with free credit check.

 

Step 3. Choose Your Loan Type

When choosing a personal loan, you need to understand the different types as each serves a specific financial need and can affect your loan terms, interest rates, and repayment structure.

Types of Personal Loans

  • Unsecured personal loans. No collateral is required and approved based on your creditworthiness. Higher interest rates than secured loans but popular for good to excellent credit borrowers.

  • Secured personal loans. Collateral required (savings account, vehicle, or other assets). Lower interest rates, but you risk losing your collateral if you don’t pay.

  • Fixed-rate loans. The interest rate remains constant throughout the loan term, with predictable monthly payments. Good for borrowers who prefer stability and long-term planning.

  • Variable-rate loans. Interest rate changes based on market conditions. These loans may start with a lower interest rate but can increase over time and result in higher monthly payments. If interest rates rise, your monthly payments may also increase.

  • Debt consolidation loans. Designed to combine multiple debts into one loan, these can simplify your finances and potentially lower your overall interest rate.

  • Specialized loans. Some lenders offer loans for specific purposes like medical expenses, home improvement, or major life events. These loans may have special terms that fit their intended use.

Step 4. Browse Your Options

After you have determined the loan amount and type, and reviewed your credit score, it’s time to research lenders to narrow down your options.

Start by visiting the websites of banks, credit unions, and online lenders to check their advertised interest rates, loan terms, and fees.

Criteria to Research

  • Loan amount. Personal loan amounts range from $1,000 to $100,000. Look for lenders that offer loan amounts that fit your borrowing needs.

  • Interest rates. Check the rates for borrowers with your credit profile between 4.99-35.99%.

  • Repayment terms. Look for terms from 1 to 7 years that fit your repayment capacity.

  • Fees. Check origination fees, prepayment penalties, and late payment charges.

  • Customer reviews. Research online reviews and ratings to check lender reputation, customer satisfaction, and service quality. This will help you choose a trusted lender.

  • Loan calculators. Use lender’s online loan calculators to estimate your monthly payments and total loan cost.

Now that you have this information, narrow down your list to 3-5 lenders that offer the best terms for your situation.

Step 5. Get Pre-Qualified

Now that you have narrowed down your options, it’s time to get pre-qualified. This is an important step that will give you a better idea of the loan amount and terms you may be eligible for. Remember, pre-qualification is not the same as submitting a full loan application; it doesn’t guarantee you’ll be approved for a loan.

Pre-qualification will help you know how much you may qualify for without hitting your credit score. Most lenders allow you to pre-qualify online with a simple form that only requires a soft inquiry on your credit, meaning it won’t affect your credit rating.

If you don’t see the pre-qualify option on the website, you can contact the lender directly. This will give you more concrete loan options to compare before you make a decision.

Step 6. Review Lender Requirements and Gather Documentation

Age

You must be at least 18 years old to apply for a loan. However, some lenders may have a higher age limit or require proof of legal capacity to contract.

U.S. Residency or Citizenship

Lenders require applicants to be U.S. citizens, permanent residents, or holders of certain types of visas. Some may allow non-U.S. citizens to apply with additional documentation.

ID & Address

Lenders require a valid ID, such as a government-issued ID (e.g. driver’s license or passport) to verify your identity and proof of your current address. This could be a utility bill, lease agreement, or bank statement.

Income

Lenders require proof of stable income to ensure you can repay the loan. This could be employment income, self-employment income, or other regular income. Minimum income requirements may apply.

Debt-to-Income Ratio (DTI)

Lenders will assess your debt-to-income ratio (DTI) which is the total of your monthly debt payments divided by your monthly income. The ideal DTI is 36% or lower, meaning your monthly debt payments should not exceed 36% of your income. For most lenders, the maximum DTI is 43% to 50% depending on the loan type and other factors. For example, government-backed loans like FHA or VA loans may allow up to 50% DTI. But the higher your DTI, the higher the risk for the lender, and that can impact your loan approval or the terms of the loan.

Loan Purpose

Some lenders may ask for the purpose of the loan (e.g. debt consolidation, home improvement, medical expenses). While many personal loans are unsecured and don’t require a purpose, some lenders may require this information.

Collateral

For secured loans, lenders may require collateral to reduce their risk. Collateral can be an asset such as your car, home, or savings account which the lender can repossess if you don’t repay the loan. Unsecured personal loans don’t require collateral, but often have higher interest rates since it’s riskier for the lender. Make sure you understand the implications of putting up collateral, as it can affect your financial situation if you can’t meet the repayment terms. 

Step 7. Choose a Lender and Apply

  • Pick the best offer. After reviewing all your prequalified loans, choose the lender that best fits your needs such as the lowest interest rate, the best repayment terms, and any additional benefits or flexibility. Make sure to consider the total cost of the loan including interest and fees to understand the full financial commitment.

  • Apply. Once you’ve chosen the best loan, fill out the full application with the lender. This will require more detailed financial information and a hard inquiry on your credit, which may affect your credit score slightly.

  • Read the offer carefully. Take your time to review the loan agreement, and pay attention to the interest rate, repayment term, fees, and late payment penalties. Make sure you understand all terms before signing the loan.

  • Know the approval time frame. Approval times vary by lender and loan type. In some cases you may get a decision in minutes or hours, in others it may take a few days. Check with the lender on their expected timeline. The faster you apply and complete the application, the faster the approval process will be.

  • Wait for the decision. After you apply, wait for the results, which may be within minutes or a few days. If your application is complete and error-free, you’ll get a decision faster.

  • Review and sign the loan documents. If approved, the next step is to review the final loan documents. These will include the loan amount, interest rate, repayment term, and monthly payment. Once you’ve reviewed and are happy with the terms, sign the documents.

  • Get the loan. After signing the loan agreement, funds are disbursed within 1-3 business days. Payment method (bank transfer or check) depends on the lender and your preference. Make sure to confirm the payment method with the lender.

Note! When you apply for a loan, lenders do a hard credit inquiry which will affect your credit score slightly. But if you apply for multiple loans within 14 days, they will be treated as one inquiry. This helps to minimize the impact on your score while you shop around.

Alternatives to a Personal Loan

  • Credit cards. Credit cards offer flexibility, but have higher interest rates than personal loans. If you carry a balance, be aware of the high APRs and fees. They are good for quick access to funds if you can pay off the balance within a month or two.

  • Home equity loans. If you own a home, borrowing against your home equity through a home equity loan or line of credit (HELOC) may have lower interest rates. These are secured loans, but you risk losing your home if you don’t repay. They are used for bigger expenses or debt consolidation.

  • Peer-to-peer lending. Peer-to-peer (P2P) lending platforms connect borrowers directly with investors, often with competitive interest rates. But the application process is time-consuming and there may be extra fees. This is good for those who can’t get credit through traditional channels.

  • Payday loans. Payday loans have very high interest rates and fees, not recommended. They are due on your next payday and can lead to a debt cycle. Avoid payday loans if not necessary.

  • 401(k) loans. Some employers allow you to borrow from your 401(k) retirement savings. These loans have lower interest rates but taking funds from your 401(k) will affect your retirement savings. If you leave your job, you may need to pay back the loan in full.

  • Auto loans. Auto loans are secured by your vehicle and have lower interest rates. Good for buying a car, but if you default, the lender can repossess the car.

  • Cash-out refinancing. With cash-out refinancing, you can refinance your mortgage for more than you owe and take the difference in cash. This is good for big expenses but increases your mortgage balance and puts your home at risk.

Conclusion

Getting a personal loan requires careful evaluation of your finances and goals. Start by checking your budget, your credit score, and loan options. Prequalification helps you gauge your eligibility, and gathering required documents speeds up the application process. Choosing the right lender means comparing terms, interest rates, and fees. Follow these steps, and you’ll make an informed decision that suits your financial needs and goals.

FAQ

What is the best place to get a personal loan?

The best place to get a personal loan depends on your credit score, loan amount, and financial needs. Traditional banks can offer competitive rates, especially for existing customers, and have reliable service. Credit unions have lower interest rates and more flexible terms, but may require membership. Online lenders have a fast approval process and are convenient for those with good credit. Peer-to-peer lending platforms are good for those with bad credit but may have higher fees or interest rates. Compare interest rates, fees, loan amounts, and terms to determine the best option for your situation.

How hard is it to get a personal loan for the first time?

Getting a personal loan for the first time can be tough, especially if you have no credit history. It may be difficult, but not impossible. Some lenders may still consider your application, but you may get higher interest rates or less favorable terms. If you can’t get a loan right away, building your credit by paying on time your existing debts can help. Checking your credit report regularly will also help you improve your score so you can qualify for better loan options in the future. 

Can I return a personal loan if I don’t use it?

It depends on the lender. Some lenders allow you to cancel a personal loan within a certain time frame without any interest or penalties. But if your lender doesn’t offer this, you can pay off the loan early, but this may incur interest or prepayment penalties. Check your loan agreement for the terms of early repayment or cancellation.

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