How to Get a Personal Loan in 7 Steps

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.

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

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.

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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.

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.

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

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.

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