Loans » Personal Loans » How To Get a Personal Loan
Advertiser Disclosure

This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval.

This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof.

Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

How To Get a Personal Loan

It is quite easier now to get a personal loan than during the time when the players were just credit unions and traditional conservative banks. How do personal loans work, what are the steps you should take in order to get a personal loan and what are the best tips to increase your chances of approval? Here are the details:
If you’re wondering how you can get a personal loan, you’ve come to the right place.

Why anybody would want to get a personal loan could be due to many different reasons.  Perhaps you’ve set your eyes on that new car model that just came out of the dealership. Or perhaps there’s a big personal celebration that’s about to take place.  Whatever it is, a personal loan can be a fast and efficient way to help you realize your dreams sooner.

Allow us to share with you some of the secrets of getting one of these loans.

What is a Personal Loan?

A personal loan is an installment loan with a fixed rate and generally, you don’t need collateral or security to get one.  The principal usually ranges from $500 to $100,000 and most lenders would require a short payment period.

It comes with a set of monthly payments – you pay the same amount every month – and a date when you need to fully pay the loan.  Lenders will use their own computations and look at your creditworthiness to set your interest rate.

People use a personal loan for different purposes, the most common of them are for consolidating other debts such as multiple credit cards or to pay for a one-time, big-time expense like a funeral.

Personal loans offer a flexible form of finance, as they can be used for practically any purpose. In this chart compiled from LendingTree consumer data, you can see that debt consolidation is the most common reason for taking out a personal loan. The least common reason is for home improvement. This is likely due to more advantageous products that can be used for home improvements such as home equity lines of credit.

percent of Personal Loans by reason

How Do Personal Loans Work?

In the recent past, lenders would simply check your credit score, examine your tax returns and get your employment details to be able to decide whether to give you a loan or not.  They will use the same factors to determine how much interest they will charge.

Lately, a newer breed of lenders has invaded the market.  They are more modern, aggressive and technology-driven.  They use non-traditional factors to make their lending decisions.  Now, they will even look at your SAT scores and your social media accounts.  Significantly, it is quite easier now to get a personal loan than during the time when the players were just credit unions and traditional conservative banks.

Personal loans vary in size (principal amount) and term (length of repayment period).  Believe it or not, there are personal loans that extend to years. In contrast, there are loans – such as payday loans –  that become due in just a couple of weeks after you have borrowed the money.

The catch is, if you pay back a payday loan within that small window of time, the lender won’t charge you interest.  But of course, they might charge you something different, like an origination fee, for them to make some money.
Be careful of some personal loans.  Some of them will start accruing interest at once.  This would include some installment loans so check very carefully.

The amount of your monthly payment will depend on the size of your loan and the lender’s interest rate for you.  Some lenders will let you get away with a slightly lowered interest rate when you sign for a longer term.

There’s a way for you to tell whether it’s better to choose the lower interest rate with a long-term or the higher interest with a shorter period.  Just find a good personal loan calculator and punch in the numbers – many of them are available online for free.  What’s the key point for all this?  Avoid borrowing anything beyond what you are capable of paying back.

Who Should Apply For a Personal Loan?

Here’s the thing:  a personal loan is not for everybody.  For starters, it is not the cheapest form of financing.  Secondly, the requirements are quite stiff such that people with credit problems would normally not qualify for it.  But, it is really an excellent option for certain borrowers, such as:

  • People who need money real fast. Yes, you might have home equity but in case of sudden need, you will not be able to tap it fast enough.  It would take weeks for the bank to appraise your property, process your home equity loan, go through an approval and finally fund the loan.  If there’s a once-in-a-lifetime investment opportunity that you need to grab right away, a personal loan could be the solution.  And think about this:  you can always use your home equity loan to pay off your personal loan once you are no longer under time pressure.
  • People who tied up their money in retirement accounts. You might have some money in your retirement fund but unless you’re old enough, touching it means paying a penalty.  A personal loan could be a lot cheaper as a source of funds.  Here’s the catch:  when you take money from your IRA or 401(k) too early, the IRS will consider the money as your income.  Therefore, you might have to pay around 10% to 39.5% income tax right away.  And did we mention there’s a 10% penalty that comes with it?  Look at this:  if you are in a 25% tax bracket, you will need to withdraw $15,000 just to net $10,000.  That’s a very, very steep price to pay.
  • People who don’t own homes or have enough home equity. Some people have really good credit and a healthy income – but they do not own a house.  Personal loans allow these good folks to get funds pretty fast when they need them.
  • People who prefer a loan with a fixed interest rate. You are dead right to say that credit cards come with a low fixed rate.  But that’s only for limited time because they skyrocket after a while.  That’s why they call them “teasers”.  If you want a true-blue fixed rate loan, a personal loan is the real thing.

What are the Qualification Requirements to Get a Personal Loan?

A personal loan requires you to meet certain requirements. Keep in mind, however, that every lender is different. These are the factors that most lenders will consider you.

  • Credit scores – Lenders will assess your credit score to determine how risky you are. The lender will also examine your income and payment history.Lenders aren't giving money to have fun. They expect you to repay the loan before the term ends. These factors will be checked to ensure they give a personal loan only to responsible individuals.
  • History of payments – FICO scores are affected by your payment history. You will lose your ability to borrow money in the future if you fail to make payments. Lenders will offer loans to those they feel will pay their bills on time.
  • Your income level – Lenders will also want to see your income. This is to make sure you can pay all the required payments. Lenders don't want to lend money that they won't see again. So they consider all these factors when determining your eligibility.

How To Get a Personal Loan in 4 Easy Steps

Here are the steps you should take in order to get a personal loan, especially if you would like to get a good rate and having the amount you need:

1. Understand Your Credit Score

Let’s jump right in: the better your credit score is, the higher your chance for qualifying for a personal loan and a lower interest rate (Check our loan prequalification calculator).  So, evaluate your creditworthiness by checking your credit score (It’s free!).  In general, credit scores fall into these categories:

  • 720 and higher: Excellent credit
  • 690-719: Good credit
  • 630-689: Fair or average credit
  • 300-629: Bad credit

Here’s the trick: do what you can to build up your credit score before you apply for a loan.  The biggest factors that pull your credit score up or down are on-time payments and the total credit you’ve used relative to your total credit limit.  So, get your free credit report and dispute any errors it may have. If you fall in the bad credit category – you should look for personal loans for bad credit borrowers.

Credit score range

2. Shop Around And Short-List Lenders

Do not for a moment believe that all loans are expensive. As soon as it occurs to you that you “need a loan”, you should already be thinking about how to get the lowest interest rate available to you.  In many cases, there will still be enough time for you to do ample research and to shop around for offers.

The great thing is that even borrowers with below-average credit would be able to get reasonably-affordable loans from online lenders and peer-to-peer lending sites.  However, if you can survive without having to obtain a payday loan or an installment loan, you’ll be much better off.

One thing’s for sure: to get a traditional lender to lend you money, you need to have decent credit.

If you’re getting a personal loan from a bank or credit union, you may be able to swing for a lower rate if you go by way of a secured loan.

Of course, you’ll have to offer some form of security or collateral to back up your loan.  It could your savings account, the title to your car, or your home equity.

3. Compare The Lenders And Select Your Preferred Offer

How do you go about comparing lenders?  Here’s a list of items that can help you narrow down a personal loan lender that is appropriate for your need:

Loan Amount

Let’s face it:  because lenders have different criteria, different lenders may grant you different amounts of loans.  And just because one lender offers you more money than the rest doesn’t mean you should grab it without thinking.

What you need to remember is that it will cost you more to borrow money and spend what you’ve already set aside.  If you can combine your savings with the amount you’ve borrowed to finance your purchase or expense, that may just be your best option.

Fees And Charges

The fee and charge structure are different for each lender in terms of their composition and amount.  Needless to say, some will charge more than the others.  Be aware of what prospective lenders will be charging and how much, compare them and go for the lender that will give you the lowest fees in total.

Loan Terms And Conditions

The loan terms and conditions are also not standard among lenders – they tend to vary significantly.  Do they charge a fixed rate or is there an option for a variable rate?  Is there a fixed repayment term?  Is there an early payment penalty?  Find out every little detail of the loan you are planning to take out.

Legitimacy

Truth be told, you might encounter some fly-by-night scammers posing as online brokers or lenders.  Always investigate whether the entity you’ll be dealing with is legitimate. Do some research and read online reviews; some people might report of encountering problems or bad experiences with that specific lender.

There are a number of reasons for taking out a loan, but this can also influence the average loan amount. In this chart with LendingTree customer data, you can see that credit card refinancing has the highest average loan amount followed by debt consolidation.

This shows that debt restructuring is one of the more costly reasons to take out a loan. On the other end of the scale, the average loan amount for vacations is the least costly reason. This may suggest that consumers may use other finance methods to cover the cost of vacations.

Personal Loan Average APR by Loan Type

4. Apply

It would be a good practice to read the terms of the loan offers and get answers to whatever questions you may have.  Specifically, watch out for the following:

  • Prepayment penalties – Most online lenders will allow you to pay off the loan early without charging you a prepayment penalty or exit fee.  So, make sure the lender spells this out in the terms.
  • Automatic withdrawals – Some lenders will require that your bank automatically withdraws your payment from your checking account.  In this case, it would a good idea to set up a low balance alert with your bank to avoid overdrawing your account and paying overdraft charges.
  • APR – You should know the total interests and charges you will have to pay.  Make sure that the lender gives full disclosure of the total cost of your loan including any origination fees and other charges that they figured into the annual percentage rate.

What's More?

On top of these items, look for other consumer-friendly features:

The lender reports your payments to credit bureaus – If the lender makes on-time reports of your payments to credit reporting agencies, it will boost your credit score.  Tip:  All lenders that NerdWallet reviews do so.

Flexible payment features – There are lenders who will let you choose your payment due date or forgive an occasional late fee and even allow you to miss a payment in case of hardship.

Direct payment to your creditors – Some lenders will take the trouble of remitting the borrowed funds directly to your creditors.  This is a convenient service for borrowers who are consolidating debt.

Once the lender – the selection process is over, you’ll need to provide the following documents to formally apply for the loan:

  • Identification – passport, driver’s license, state ID or Social Security card
  • Verification of address – utility bills or a copy of a lease
  • Proof of income – W-2 forms, pay slips, bank statements or tax returns

Can I Get a Small Personal Loan?

Sometimes you might need to borrow a little extra cash, whether your month is longer than your paycheck or an unexpected expense arises.

Although some lenders limit their lending to larger amounts, there are still many places you can go for a personal loan. However, make sure you can afford the loan. and carefully review the interest rates  – many lenders may charge very high rates.

  • Online lenders – Many Online-only lenders specialize in unsecured personal loans that you can use for anything. It's often easy to determine if you are eligible for a loan. It may take only a few days to submit the application and have the funds transferred to your bank.
  • Credit unions and banks – Personal loans are offered by some traditional banks and credit unions. While you can apply online, some institutions require that you visit a branch in person before the funds are released. Some institutions allow you to apply online but require that you visit a physical branch before releasing the funds.
  • Peer-to–peer (P2P), lenders – Online lending platforms connect borrowers and investors who are willing to lend money. These platforms often have low interest rates and offer a fast application process. Some P2P platforms do not offer small loans. LendingClub and Upstart are two examples.
  • Family and friends: Borrowing money to friends or family can cause problems in relationships. However, it can be a great option if you have the funds and someone who is willing to lend you the cash. You should make sure that you have a written agreement outlining how and when you will repay the loan.
  • Title and pawn loans: This may also be a familiar topic. Pawnshop loans allow you to bring in an item that is valuable in return for a small loan, up to the item's value. You must repay the loan prior to the end of the term. The term varies from one state to the next. You may be required to pay high fees and interest even if you do not repay the loan. The pawn shop will keep the item if you fail to repay the loan. Usually, none of the proceeds go to you.
  • Payday loans – This might be a good option for those with poor credit ratings or no credit history. These lenders don't usually conduct credit checks and you can generally get your money right away. Payday loans, which are short-term loans of $500 or less, are due by your next payday. They are often used to help bridge financial gaps until you get paid again.
  • Lines of credit or high-rate installment loans – Online and branch-based lenders may offer installment loans.  Credit lines with High interest rates (from 60% to 199%) and high fees. These are usually cheaper than payday loans but they should be used only as a last resort because the high interest rates can make it difficult to repay. When comparing these fast cash personal loans from online lenders, consider rates and terms as well as the time it takes for a lender to fund a loan. Consider whether you are able to delay borrowing, especially if your rate is high.

Tips To Increase Your Chances of Approval

There are a few things you can do to improve your chances of getting an approval.  Do these things before you apply for a personal loan:

Determine The Type Of Personal Loan You Need

When people talk about personal loans, they usually refer to the unsecured, closed-end installment loans.  Strictly speaking, auto loans, mortgages, payday loans and credit cards also fall into the category, as opposed to business loans.  Make sure you are clear as to what type of loan you are applying for.

Quite simply, if a lender determines that your credit is not good enough for you to get prime interest rates or even qualify for a loan altogether, they may instead offer a secured loan.  Should you be okay to put up your vehicle or home as collateral, a title loan, mortgage or home equity loan may be an option to get better rates.

Just remember that in the case of a secured personal loan, you could lose your property if, for whatever reason, you are unable to pay the loan back. Anyway, taking a personal loan in order to invest the money can be a risky step.

Know Your Financial Boundaries

If you are seriously pursuing a loan, you should already be mindful of your credit history and current score.  The bank would normally tell you the range of credit scores that would merit their approval.  Have foresight and request a copy of your history and score weeks before you actually lodge in an application.

Check your credit history for accuracy and make sure you have enough time to rectify any errors in your history.  Most lenders will give weight to your past use of credit.  If your report has mistakes, you may end up with a lower score, therefore, hurting your chances of loan approval.  Consider your financial limitations if you want to borrow money.  Apply for a personal loan based on how much you can afford to repay on a monthly basis.

Make a Checklist

Using the information from the bank, it is helpful to create a checklist of the necessary documents you need for the loan application.  Remember that it may take time to get the necessary documents from their sources:  creditors, employers, other persons or entity.  Incomplete applications usually don’t pass approval.

Improve Your Credit Score

The good news is, your credit score is not permanent.  You can take steps to improve your credit score before you apply for a personal loan.  This is especially important when your credit score is about to breach the next classification bracket.

Let’s say your credit score is pushing 770 – that’s already in the excellent bracket.  Increasing it to 780 won’t really make a difference.  But, if your credit score is around 680, heaving it over the 700 mark would increase your chances of getting an approval.  What’s it all about?  You tend to save a lot of money when you qualify for lower interest rates.

You can improve your credit score by these simple step:  always pay your bills on time and reduce your debt-to-available-credit ratio.  If you have a record of late payment or any other negative item on your history, waiting for six months while making sure you update all your payments will help.

If you’ve developed a good relationship with the lender that reported the negative item, you can try writing them a nicely-worded request to blot out the negative item.

credit score factors

Stick to Reputable Online Lenders

Shopping for a personal loan lender online is the best way to go.  It will save you time and money and save you from all the hassle of running around offices and counters.  And since online lenders have lower overheads, they can offer lower rates that would be of huge benefit to you.

But first, a warning:  there are plenty of shady online ‘lenders’ out there.  They will guarantee loan approval but will try to skim you dry with advance fees – without giving you a loan.  Be sure that your online lender is a state-licensed financial institution that has no past or pending lawsuits.  Check with the Better Business Bureau to see their profile and find out their rating.

J.D. Power U.S. Lending Consumer Satisfaction 2020

Don’t Be Afraid To Ask Questions

If you’ve made the choice for the loan package you want, contact the bank directly to know firsthand what are the requirements for loan eligibility.

It might need a face-to-face meeting with a bank representative to discuss the materials, documents, and timelines of the approval process.  Banks have different requirements so it is important to know what they are so you can prepare adequately.

Take One Bank At a Time

This is important:  don’t apply for a personal loan in many banks all at the same time.  You might be thinking that the more application you send, the bigger are your chances of getting an approval from two or more banks.

It’s not really a very wise move.  Doing this will reflect during your credit investigation and banks may conclude that you are financially desperate – which is not good at all.  You are actually increasing your likelihood of getting declined.

Pay Attention To Your Debt-To-Income Ratio

The trick is to apply for as little amount as possible and be certain to report your actual income.  Never under report nor overstate.  Loan officers sometimes overlook a borderline credit score or one or two occasional credit indiscretions if your income is high in relation to the amount you want to borrow.

Unless the bank requires otherwise, provide them with your pre-tax earnings and be sure to include all sources of income.  When the lender does not prohibit it, you may include your spouse’s income as well.

What we really want to say is, do not fall into the temptation of inflating your income or lying on a loan application.  If a lender does not ask for a particular document to prove your income level, there is a tendency to get a bit creative.  Just make sure that for whatever you indicate about your income, you can easily justify and provide evidence.  If you lie about your income, you open yourself to criminal charges especially if you are unable to pay back the loan that you obtained with a bit of deception involved.