If you need to buy a car, you take out an auto loan. If you want to buy a house, you get a mortgage.
But what if you need something more specific, like money for your wedding or for a home repair? For those needs, you can take out a personal loan.
Personal loans can help take care of an unexpected expense like a car repair, /home improvement project, or an outstanding medical bill.
If you have multiple outstanding credit card balances, you can also use a personal loan to consolidate them into one affordable payment. With a personal loan, you can pay for essentially anything.
A personal loan lets you borrow money in a lump sum at a fixed rate. You repay the money in installments over a period of time, usually between two and five years. Taking out a personal loan is usually cheaper than using a credit card.
9 Steps to Get a Personal Loan
Getting a personal loan is a fairly straightforward process. If you’ve applied for other types of loans, the steps will look familiar.
1. Decide between a secured or unsecured loan
The first step to getting a personal loan is to decide whether you’re interested in a secured or unsecured loan. To get a secured loan, you’ll need to offer an asset you own as collateral. If you default on your loan, the lender will take your asset. The asset can be your house, car, or another valuable item.
A secured loan can give the chance to borrow more money at a lower interest rate because the collateral makes lenders feel more confident they’ll get their money back if you stop making payments.
An unsecured loan, on the other hand, doesn’t involve any collateral and comes with a quicker application process. It’s more difficult to qualify for than a secured loan, so it may not be an option if you don’t have the best credit.
2. Assess your creditworthiness
Your creditworthiness describes how responsible you are with loans and how likely you are to repay your loan. When lenders consider you for a personal loan, they’ll look at your credit report to figure out whether you’re a responsible or risky borrower.
It’s a good idea to get a free credit report from one of the three major credit bureaus — Experian, Equifax, or TransUnion — before applying for a loan.
If you have subpar credit, you may want to focus on improving your credit by doing things like paying your bills on time and lowering your total credit use before applying for a personal loan. This way, you can increase your chances of landing a favorable interest rate and terms.
3. Compare rates online
Interest rates vary from lender to lender. Look at several different lenders including banks, credit unions, and online-only lenders to find out what kinds of rates they’re offering. Comparing rates online can reduce your risk of overpaying for a personal loan.
4. Get pre-qualified
Once you’ve found the right lender, you’ll need to go through the pre-qualification process. While the exact steps to prequalify will depend on the lender, most lenders require you to apply for a personal loan online, in person, or via phone.
They’ll ask for personal information such as your name, address, income, employment details, and the amount you want to borrow. After the lender has reviewed your application, it’ll send you some loan options.
5. Look for the best deal
Don’t make the mistake of pre-qualifying with just one lender. By pre-qualifying with several different lenders, you can compare all of your options and find the best deal available to you.
Looking for the best deal can save you hundreds or even thousands of dollars down the road. Don’t forget to look at online-only lenders who may have better rates and lower fees.
6. Know the alternatives to a personal loan
Although a personal loan may make sense for your situation, you should know your alternatives before pursuing one. A 0% APR credit card can be beneficial if you need access to quick cash and are confident that you’ll be able to repay it on time and in full. These offers are usually only available to people with excellent credit.
You may also look into a home equity line of credit, or HELOC, where you can get a revolving credit line that’s secured by your home. A HELOC may have a lower interest rate because the home is used as collateral. If your home has equity and you know you’ll be able to pay off your loan and avoid foreclosure, this may be a good choice.
Consider getting a co-signer if you don’t qualify for a loan on your own.
7. Understand your offers
Take the time to really understand all the personal loan offers you get. While it’s important to look at interest rates, monthly payments, and terms, it’s just as crucial to compare fees, payment options, and other important details.
One offer may have the lowest interest rate and seem like the best option, but it may have a higher APR or charge a prepayment penalty. Understanding the ins and outs of each offer can help you avoid unwanted surprises later on.
8. Submit your application
When you’ve decided on a lender and offer, it’s time to officially submit your application online, in person, or via phone. You’ll need to submit some documents, so gather those in advance to expedite the process. These documents may include tax returns, recent pay stubs, and a valid ID.
When you submit your application, the lender will likely perform a hard credit inquiry, which can affect your credit score. To avoid lowering your score drastically, try not to apply for too many personal loans at once.
Once you’ve submitted your application, you’ll need to wait for a decision from the lender. While some lenders guarantee same-day decisions, others take a few business days or longer to get back to prospective borrowers.
9. Accept your loan
You’ll have a few business days to accept the loan after you’ve been approved. When you accept the loan, find out when the first payment is due. Consider setting up automatic payments from your checking account.
Automatic payments can reduce your risk of forgetting to pay on time and can even land you some great discounts on your interest rate. If possible, add extra payments to your loan each month. This can save you money on interest and help pay off your loan early.
A Personal Loan Can Save You Money
As long as you take the time to find the best offer and lender, a personal loan can be a great way to cover your expenses or make large purchases without breaking the bank. If you make payments on time, you can even improve your credit score in the process.