How to Get a Personal Loan – What You Need To Know
Everybody needs some extra cash every once in a while. Even if you have a fully stocked emergency fund and own plenty of assets, you might find yourself needing to borrow a little more money for particular projects.
Enter personal loans.
Personal loans function like any other loan. You borrow money from the lender (usually a bank or personal lending company), then pay back the loan plus interest in monthly installments.
However, unlike specific types of loans like mortgages and auto loans, personal loans can be taken out for almost any reason.
Now, there are some best practices to follow when looking for personal loans. Keep reading to find out how to get a personal loan.
Do You Need a Personal Loan?
Before you start looking for a personal loan, it’s best to determine why you feel the need for a personal loan in the first place.
Obvious as this may seem, personal loans are not free money.
Like all debt, you’ll have to pay back the loan and interest.
But unlike many other types of debt, personal loans aren’t only “good” or “bad” debt; it depends on what you use the personal loan for.
Examples of responsible personal loan use include
- Debt consolidation/refinancing – Collect debts in one place and secure a better interest rate.
- Remodeling home – Your home is an asset; remodeling can increase its value.
- Purchasing appreciable and/or income-producing property – Again, if you use debt to acquire an appreciable and/or income-producing property, you’re earning a return on your debt investment.
Some activities are more risky to fund with personal loans, but alright if you’re a responsible debtor:
- Medical bills – Personal loans are a good last resort, but you should ideally have emergency fund/savings for medical bills.
- Vacations – A small personal loan can afford you a much more fun and relaxing vacation. Just don’t use personal loans to go on a 3-month global cruise if you’re making $50,000 a year.
- Miscellaneous large purchases – You could use a personal loan if you need to buy some furniture, a car, or other similar large purchases.
At the end of the day, almost any use of a personal loan could be a good financial decision if you have a plan to pay it back.
But if you just want to go on a lavish vacation way above your means, you’re not going to have a fun time once you step off the plane when your vacation ends.
To fully understand how to get a personal loan, let’s cover a few common terms.
Secure vs. Unsecured Debt
Secured debt is debt backed up by collateral, aka an asset you put down in exchange for the loan. Under secured loans, the lender can seize (take possession of) your collateral if you default on your debt.
Unsecured debt isn’t backed by collateral. Personal loans are generally unsecured debts.
Prequalification and preapproval should have separate definitions, but the truth is different lenders use them differently.
But anyways, prequalification/preapproval is an “almost” guarantee that you’ll get a loan. The lender gives you an estimate on the loan principal and terms based on basic financial information your provide them.
That’s about all the terminology you need to know to understand personal loans. Keep reading to see how you get one!
Steps To Getting A Personal Loan
Step 1: Check Your Credit Score And Report
You’re almost ready to start looking around for loans.
But before you do so, check up on your credit report and score.
First, your score.
Lenders don’t necessarily disclose what kind of score they like to see. However, lenders prefer good credit or better for obvious reasons.
You could still land personal loan offers with iffy credit, but your rates will be higher.
Work on improving your score a bit if you can afford to wait that long.
That brings us to our next point: get a copy of your credit report. On your report, you can see a detailed breakdown of your credit history so you can identify ways to improve your score.
Also, there’s always the chance that your credit report has errors; these will drag your score down through no fault of your own!
Thoroughly scan your report for errors. Submit a dispute ASAP for each error your find; this will give your score a nice upward nudge.
You can check your credit score and report for free on sites like Mint and Credit Karma. In addition, each of the 3 credit bureaus (Equifax, Experian, TransUnion) give you 1 free report per year.
Step 2: Get Prequalified For a Few Loans
To maximize your loan options and save time, you’ll want to snag some prequalification offers from lenders. Most lenders run a soft inquiry (doesn’t damage your score) into your credit so you can get an idea of what kind of rates and loan terms you’ll get.
Most personal loans come from personal lending companies nowadays.
Some personal lending leaders include:
- Marcus by Goldman Sachs
On top of those, many banks offer unsecured personal loans. Credit unions do as well; however, credit unions are typically more lenient about your credit and may offer lower interest rates.
During prequalification, you’ll have to provide most (if not all) of the following information:
- Basic information (name, address, email, phone)
- Employer information (name, address, phone)
- Current monthly debt obligations
- Social Security number
- College name and major
Gather this information beforehand for a smooth prequalification process.
Step 3: Compare Your Prequalifications to Each Other (and to Other Options)
You’re in a good spot once you have a few offers in hand. Now, you’ll want to compare all your options with each other.
You’ll want to consider the total loan amount offered, monthly payment amounts, loan term length, and interest rates.
Don’t limit yourself to just personal loans, though. A solid alternative to personal loans for those with at least good credit would be a 0% credit card. If you qualify, you can transfer your debt balance to this 0% card and pay 0% interest for a year and maybe even longer.
If your credit’s not so great, consider taking out a secured loan instead. Lenders are much more willing to risk their money if they at least get an asset in exchange if you go into default.
Lastly, if you need that personal loan and truly can’t go with an alternative, find a co-signer. Lenders will consider both your and your co-signer’s income and credit.
Step 4: Read the Fine Print
There’s always a catch or several to every loan offer. Don’t skip over the fine print!
Be on the lookout for
- APR – Your loan’s total cost should be clearly disclosed in the loan and calculated into your APR.
- Fixed or variable? – Does interest change with the market or stay fixed?
- Prepayment penalties – Ideally, you want a loan that won’t punish you for paying it off early.
- Automatic withdrawals – Does the card company require auto pay? If so, you’ll want to set up alerts with the linked bank account to ensure you don’t overdraw.
Step 5: Formally Apply For the Loan
So you’ve identified which prequalification offer you’d like to move forward with.
Since you’re already given the lender most of the required information, all they need now is a formal loan application.
On this application, you’ll provide all the documents to support the information you gave them for prequalification:
- Identification – Driver’s license, passport, Social Security card, or some other form of state-issued ID
- Address verification – Copy of your lease agreement or a utility bill
- Proof of income – Pay stubs, bank statements, W2’s, tax returns
The lender will take this information and run a hard inquiry into your credit. This will hurt your score a few points, but even people who are brand new to credit quickly bounce back from hard inquiries.
Plus, hard inquiries are erased from your report after 2 years.
Step 6: Accept the Loan
Finally, the lender will offer you the final loan upon application approval. Accept it, and they’ll direct deposit the loan within a business day or two.
Congrats! You now have a personal loan.
Stay current on all your payments. The last thing you want is to pay more interest and suffer damage to your credit.
Keep in mind that you usually have to pay a financing charge to the lender, which is taken out of your principal. You’ll need to take out a little more than the exact amount to cover the financing charge and still get the money you need.