How personal loans work in 7 simple steps |

How do personal loans work? Here’s the process in 7 simple steps

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What you’ll need to increase your chances of approval when you apply.

If you’ve never taken out a personal loan before, it might be difficult to figure out what you should do. There are so many options, and figuring out where to start is almost as hard as choosing the right lender or negotiating terms. Fortunately, there’s a way you can get a head start. By following a few simple steps, you can make sure your personal loan experience is positive – and doesn’t cost you an arm and a leg.
Credible Personal Loans

Our top pick: Credible

Quickly get personal loan offers from top online lenders.

  • Minimum Loan Amount: $1,000
  • Maximum Loan Amount: $100,000
  • Loan Terms: 2 to 7 years
  • One simple form
  • Must have good to excellent credit

    How do personal loans work?

    Personal loans are similar to other types of loans: You borrow money from a lender to pay for personal expenses for a predetermined amount of time. The money you borrow can be used to cover almost any expense, though some lenders won’t allow you to use your funds for business purposes or secondary education. During your loan term, you’ll make monthly payments that go toward your principal, interest and fees.

    The personal loan process

    Jump ahead to one of the steps in the personal loan process to find out more about it.

    1. Comparison 2. Eligibility 3. Application 4. Approval 5. Loan funding 6. Repayment 7. Loan closure

    Step 1: Compare your options

    There are a few different types of loan, and the one you apply for will depend on your needs.

    After you’ve decided what type of personal loan you want to apply for, here’s how to compare the personal loan offers from different lenders:

    • Loan amount. What is the minimum and maximum amount the lender lets you apply for and is it enough?
    • Loan terms. What are the minimum and maximum loan terms? Usually terms of between one to seven years are available, but it differs between providers.
    • Fees. Check for upfront fees such as establishment or application fees and ongoing fees such as monthly or annual fees.
    • Interest rate. Is the rate fixed or variable? Is it competitive?
    • Repayment amount. Once you know your loan amount and terms, you can use a loan repayment calculator to see if the repayments will be affordable on your budget.
    • Repayment terms. Can you choose your repayment schedule? Can you make extra repayments without a fee? Can you repay the loan early without penalty?

    Compare your personal loan options

    Rates last updated November 21st, 2018

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    Unfortunately, none of the personal loan providers offer loans for that credit score. If you are in urgent need of a small loan, you might want to consider a short term loan.
    Name Product Product Description Min. Credit Score Max. Loan Amount APR
    Monevo Personal Loans
    Quickly compare multiple online lenders with competitive rates depending on your credit score.
    3.34% to 35.99% (fixed)
    Credible Personal Loans
    Get personalized rates in minutes and then choose a loan offer from several top online lenders.
    Good to excellent credit
    4.99% to 36% (fixed)
    LendingClub Personal Loan
    A peer-to-peer lender offering fair rates based on your credit score.
    6.95% to 35.89% (fixed)
    SoFi Personal Loan Fixed Rate (with Autopay)
    No fees. Multiple member perks such as community events and career coaching.
    6.99% to 14.87% (fixed)
    NetCredit Personal Loan
    Check eligibility in minutes and get a personalized quote without affecting your credit score.
    34% to 155% (Varies by state) (fixed)
    Marcus by Goldman Sachs Personal Loans
    Consolidate your debt or pay off large expenses with competitive rates and no fees.
    Good to excellent credit
    6.99% to 24.99% (fixed)
    Even Financial Personal Loans
    Get connected to competitive loan offers instantly from top online consumer lenders.
    4.99% to 35.99% (fixed)
    Conveniently check your loan options without affecting your credit score.
    9.95% to 35.99% (fixed)
    OneMain Financial Personal and Auto Loans
    An established online and in-store lender with quick turnaround times. Poor credit is OK.
    16.05%–35.99%* (fixed)

    Compare up to 4 providers

    Step 2: Check the eligibility criteria

    While the basic eligibility criteria you need to meet varies by lender, these are the most common points lenders consider on your application.

    • Credit score. Although online lenders weigh credit score differently than traditional lenders, you’ll still have to meet a minimum credit score in order to qualify for many personal loans.
    • Employment. Most lenders will require you to be employed and working a stable job. Some lenders may consider alternative forms of income such as retirement or investments.
    • Income. You may need to earn over a certain amount to be eligible to apply for a loan, but some lenders would rather see a low debt-to-income (DTI) ratio, usually under 30%.
    • Residency. Most lenders will require you to be a US citizen, permanent resident or on a long-term visa, though there are lenders that accept nonresidents.
    • Age. You’ll need to be at least 18 in most states, although some states require you to be 19 or older.

    Just because you meet these requirements doesn’t mean you’ll be approved for a loan. You’ll need to be able to afford what you borrow without straining your budget. Lenders will look at your income, outstanding debts and employment in order to determine if you’re an eligible applicant.

    Step 3: Complete the application

    The application process for a personal loan differs between lenders. Many lenders give you the option to apply online, at a branch or over the phone. Usually, you’ll have to submit a variety of documents and information to your lender, either during the initial application or after you’ve been preapproved.

    To process your application, your lender will need you to supply a few basic pieces of information first.

    • A government-issued ID. You’ll need to provide your driver’s license, passport or another form of government-issued identification when applying for a loan.
    • Proof of income. Depending on the lender, you may need to provide three to six months of pay stubs or bank account statements. If you’re self-employed, lenders may request tax returns from the last two years.
    • Other financial documents. If you have other debts, such as loans or credit cards, you may need to provide statements from those accounts.
    • Social Security number or TIN. Lenders will request your SSN or TIN (tax identification number) so it can confirm your identity.

    Online applications usually take just a few minutes to complete if you have all your information ready to go. Applying over the phone or at a branch takes a bit longer, but you’ll have someone there to help you through any confusing steps.

    Step 4: Wait for an approval notification

    Some lenders electronically underwrite your application and can provide a preliminary preapproval answer within a few minutes. Others process their applications more slowly, which can take days or weeks. No matter which your lender does, there are two steps when you receive approval: conditional approval and full approval.

    Conditional approval, or preapproval, usually takes less time because the lender is simply assessing your strengths as a borrower. It’s given pending more information from you, such as additional pay stubs or documents relating to your assets or debts. The lender will still need to fully underwrite your application and check your credit before issuing full approval.

    Full approval is given when you’ve supplied sufficient information for the lender to make a decision on your application. Your lender will provide you a loan contract or loan agreement that outlines how much you’ll be borrowing, how much you need to pay back and other important details regarding your loan.

    Step 5: Receive your loan funds

    Lenders are able to fund your loan in a number of ways. For example, when you take out a car loan, the lender may pay the car seller directly. This is often the same case with loans for debt consolidation.

    If you’re borrowing an unsecured personal loan, the funds will be sent to the bank account you provided to the lender. It generally takes a few business days for the loan to be transferred, and you may be able to sign up for automatic payments to reduce your interest rate – or at least minimize the risk of forgetting to pay on the due date.

    Step 6: Figure out repayment

    Most repayment terms are monthly. Some lenders only work online and only accept direct payments from your bank account, while others will allow you to pay back your loan via check or money transfer. If you plan on making extra payments toward your loan or paying it off early, make sure your lender doesn’t have restrictions on how much you can pay per year and that it doesn’t have any prepayment penalties.

    Step 7: Close out your loan

    If you’re simply making your payments as set out in your loan contract, then your loan should be closed following your final payment. However, if you’re planning to repay your loan early, it’s a good idea to call the lender and get a final payout figure. This ensures your loan will be closed when you make your final payment and you won’t be charged any unexpected interest.

    4 common personal loan traps

    1. Insurance. Some lenders try to stick on life or unemployment insurance policies into your loan documents. While having insurance can be beneficial, these policies can also be expensive and make your loan unaffordable. If you’re interested in life insurance, be sure to do some research first before agreeing to a plan.
    2. Origination fees. It’s not uncommon for lenders to charge origination fees, but what some borrowers don’t realize is that this fee is subtracted from your loan amount before you receive your funds. In other words, you never see all the money you qualified for. For example, a 10% origination fee on a $1,000 loan means you’ll only receive $900 in your bank account.
    3. Prepayment penalties. You likely won’t be able to save on interest if your loan comes with a fee for paying it off early. Prepayment penalties are a way lenders can ensure that they get as much of a return on your loan as they would have if you stuck to the original payment terms.
    4. Precomputed interest. This type of interest is added to your loan balance before you start making payments, rather than accruing over time. Precomputed interest means you can’t save on interest if you repay your loan early and essentially acts like a built-in prepayment penalty.

    When should I avoid a personal loan?

    Personal loans can be useful tools when you’re looking to consolidate debt or pay for a big expense upfront, but that doesn’t mean they’re always the best idea.

    • Making a large purchase. Some things are better saved up for. Events like weddings and expensive vacations can be costly, and many financial experts advise against borrowing money for something that has no resale value.
    • During a credit rebuild. While debt consolidation can be a good way of minimizing open accounts, this may not always be the best way to boost your score. Instead, make timely payments to your accounts and negotiate your debt with your current creditors instead of opening a new account.
    • Spending too much. It may seem like an obvious point, but don’t overlook it. Taking out a personal loan for discretionary spending can be a waste of money. Instead, a line of credit or a credit card with a low limit may be a cheaper way to handle everyday purchases.

    Bottom line

    Personal loans can take a variety of forms and be used for almost anything, but that doesn’t mean you should go with the first lender you find. Compare your options after you learn the process so you can find the right type of loan to cover whatever expense you need covered. Be prepared to commit to some serious research, and follow these steps so you know your loan is benefiting you.

    Frequently asked questions

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    US Personal Loans Offers

    Important Information*
    Credible Personal Loans

    Get personalized rates in minutes and then choose a loan offer from several top online lenders.

    Monevo Personal Loans

    Quickly compare multiple online lenders with competitive rates depending on your credit score.

    LendingClub Personal Loan

    A peer-to-peer lender offering fair rates based on your credit score.

    SoFi Personal Loan Fixed Rate (with Autopay)

    No fees. Multiple member perks such as community events and career coaching.

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    4 Responses

    1. Default Gravatar
      AudreeDecember 10, 2017

      I was thinking of applying for a 5,000 loan for a wedding. Does it matter if I apply for the loan now, even though I plan to have it a year or so later?

      • finder Customer Care
        AnndyDecember 12, 2017Staff

        Hi Audree,

        Thanks for your question.

        If you’re using an unsecured personal loan to fund your wedding, lenders often don’t care what you use the funding for and when you will use it, as long as it’s a legitimate purpose.

        You may check our guide and compare your wedding personal loan options here.


    2. Default Gravatar
      DonnaOctober 9, 2017

      Back in 2003 HFC home finance gave me a loan at 10 % on $14.000 dollars and I paid $252 .00 per month on the 17 th each month and after x3 years the principal never went below $10.000 dollars and I paid 5 years and 3 months and called the offices and they told me I had a very high interest rate on the money ! I asked why it was suppose to be %10 and they said it was %100 or %200 percent plus I charged $1700 dollars on my credit cards back in 2009 and in 2011 I paid them checks out of my mothers checking account another $1000 dollars and the chain of collections keep calling my husband for money I owe.

      • finder Customer Care
        HaroldOctober 10, 2017Staff

        Hi Donna,

        Thank you for your inquiry.

        While we do not represent any company that we feature on our pages, we can offer you a general information. It would be nice if you can call the lender directly to clarify this matter. HFC Bank doesn’t operate in the US, so you may want to confirm the terms are permitted based on location’s regulations

        I hope this information has helped.


    US Personal Loans Offers

    Important Information*
    Credible Personal Loans

    Get personalized rates in minutes and then choose a loan offer from several top online lenders.

    Monevo Personal Loans

    Quickly compare multiple online lenders with competitive rates depending on your credit score.

    LendingClub Personal Loan

    A peer-to-peer lender offering fair rates based on your credit score.

    SoFi Personal Loan Fixed Rate (with Autopay)

    No fees. Multiple member perks such as community events and career coaching.

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