How to get a personal loan in 6 steps

Many lenders will allow you to see if you qualify with no credit score impact, as they use a soft credit check. This makes it easy to shop for the best possible rates and terms. Once you decide to proceed, they’ll confirm the details by pulling a hard credit check. Each lender sets their own qualifications, so the ability to see what you can get without hurting your credit score is helpful.

Ultimately, your lender will “want to know that you will pay off the loan on time and in full,” said Gates Little, the president of The Southern Bank Company. “Typically, a score over 760 will have little problem securing a personal loan, but aim to move your score above 725 to access more options,” Little explained. This will also help you get the best rates.

However, having a low credit score doesn’t necessarily mean you won’t get approved. Little mentions that you may be able to get around a low credit score by securing the loan with collateral (for example, offering your lender assets like cash, a car or your house) or even using a cosigner who has good credit.

Additionally, some lenders offer loans to people with little-to-no credit or low credit scores without the use of compensating factors like collateral or a cosigner. For instance, they consider your entire financial situation rather than just your credit score. Some might even use alternative data to approve you (rent payments or cell phone bills) rather than your credit score.

Before getting any type of loan, it’s important to evaluate your budget and see how much you can afford. Lenders want to make sure you can afford to repay the loan. One of the ways they do this is by evaluating your debt-to-income (DTI) ratio, which compares how much debt you have to your income.

Although DTI ratios vary by lender, a good rule of thumb is to keep the ratio to 43% or lower, although some lenders may approve you with a DTI as high as 50%. Regardless of how much you can get approved for, Little noted that it’s important to only apply “for an amount that makes sense for your financial situation.” Be realistic about how much you can afford.

As you’re evaluating how much you can afford, the three main factors used to calculate your monthly payment include the loan amount, interest rate and repayment term. For example, let’s say you got a $5,000 loan with an annual percentage rate (APR) of 11.48% and a 24-month term (the recent average interest rate reported by the Federal Reserve). You would pay $234.16 a month for this loan.

However, remember that you’ll pay more interest over time with a longer term, as the loan will be outstanding for longer. So, a best practice is to choose the shortest term you can easily afford.

As mentioned, there are two primary types of personal loans – secured and unsecured. Unsecured loans are generally better for those with good credit, as they’re harder to qualify for than secured loans. You may be able to qualify for an unsecured loan with poor-to-fair credit; however, you’ll typically pay a higher interest rate than you would for a secured option.

Lenders are taking on less risk with a secured loan since they can take the assets you pledge as collateral to repay the loan if you don’t pay as agreed. Easier qualifications, better terms and lower rates reflect the lower risk. In many cases, repayment terms are longer and loan amounts are larger with secured loans.

Besides these two options, some lenders specifically say they offer debt consolidation loans. If you get this type of loan, it can be unsecured or secured. The main difference is that some lenders who offer debt consolidation loans make it easier to distribute the loan proceeds to your existing lenders by doing it for you.

» MORE: Types of personal loans (2023)

You can get personal loans from banks, credit unions and online lenders. As you’re shopping around, consider your credit score, budget and the type of loan you need. If you’re unsure what your credit score is, consider pre-qualifying to see what you can get. You can use the pre-qualification you get from one lender to compare offers from others.

You can get pre-qualified or preapproved online, over the phone or in person if you're working with a local bank or credit union. While many lenders use soft credit checks, some lenders may pull a hard credit inquiry, which can temporarily lower your credit score.

If you’re applying for preapprovals with multiple lenders, we suggest submitting all applications within the same month to minimize the effect on your credit score.

Besides the interest rate, pay attention to the loan’s APR and fees. While some lenders don’t charge any fees for their personal loans, others do. As such, the loan’s APR is a much better way to compare offers versus the loan’s interest rate.

Some of the most important things you should review before getting a loan are:

• Interest rate: This is the rate used to calculate how much interest you owe at each payment period. The rate you can get will vary depending on what’s happening in the economy, the type of loan you get (secured versus unsecured) and your credit score.
• Fees and APR: Some lenders charge application or origination fees to cover the costs of making the loan. The loan’s APR considers these fees and the loan’s interest rate.
• Repayment term : This is how long you have to pay off the loan. While terms commonly range from 12 to 60 months, they could be as few as six months or even 84 months or longer with a secured loan. While longer repayment terms will yield lower payments, keep in mind that you’ll pay more in total interest costs.
• Prepayment: One way to save interest is by paying off your loan early. However, some lenders charge a prepayment penalty, which can make paying off the loan early.

For most lenders, the pre-qualification and loan application processes are essentially the same. You’ll usually apply online. Even if you visit a bank or credit union branch in person to apply, most have you complete an online application while you’re there. You’ll typically need to include:

• Name
• Birth date
• Tax identification number
• Contact information
• Job history and employer
• Details about your income and existing debt

It may take as few as several minutes to see if you’re pre-qualified, but it might take up to several days. Once you’re pre-qualified or preapproved (some lenders use these terms interchangeably), the lender will let you know the rates and terms you can get.

If you decide to proceed, you’ll select the option you want and provide any additional information to the lender. For instance, you may need to provide your lender pay stubs, tax returns, bank account statements, and collateral documentation (for example, a copy of your car’s title). Also, you’ll usually need to agree to a hard credit check if the lender hasn’t already pulled one.

Depending on how quickly you provide the information and how fast your lender processes the loan, you may receive funding as soon as the same day. However, getting funded could take several days or up to a week. You can speed up the process by being as thorough as possible on the application and promptly responding to your lender’s requests.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

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