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

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

We know that everyone's situation is unique and we aim to help you find the right product for you. We may receive compensation when you visit our partners' sites or are approved for their products. You can read more about how we maintain editorial independence and how we make money here.

Find out how personal loans work and what you’ll need to apply.

Personal loans are a big part of many people’s lives. If you’ve never borrowed one, it may seem a little complex. Lenders often require a lot of information, and finding the right financing can take time.

Before you start, you’ll need to know how much you want to borrow and for how long. Once you have this information, you can start comparing options to find the best personal loan for your unique situation.

Prosper Personal Loans

Prosper

You could borrow up to $40,000 for a variety of purposes, with rates starting from 6.95%–35.99%.

  • Recommended Credit Score: 640 or higher
  • Minimum Loan Amount: $2,000
  • Maximum Loan Amount: 40000
  • Loan Term: 3 or 5 years
  • Turnaround Time: 1-3 business days
  • Simple online application process
  • No prepayment penalties

    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, which you eventually repay with interest and fees.

    Before applying, you first need to figure out what type of personal loan you want. Compare lenders offering that loan, making sure you’re eligible. Once you’ve found your match, get all of your documents together and fill out the application.

    How long it takes for your lender to get back to you depends — it can be anywhere between a few hours and a few weeks. If you’re approved, you should receive your funds shortly, after which your repayments will start. Your loan is closed once you have paid off your balance.

    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 and seven years are available, but terms differ 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 the rate 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?

    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: Loan Choice

    Finding the right personal loan is the first step of the process. Choosing a loan type depends on what you need funded. There are four main types of personal loans you’ll need to consider before making your final decision.

    Compare your personal loan options

    Rates last updated July 16th, 2018

    Reveal your potential loan offers and rates

    Answer two quick questions to filter the loan offers and get the best one for you.

    Select your credit score range

    I don't know my credit score

    Finally, select where you live.

    To get your credit score:

    Experian logo

    Experian is a leading provider of personal and business credit reporting. Find out your FICO score now for less than the cost of a cup of coffee.

    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
    Even Financial Personal Loans
    Get connected to competitive loan offers instantly from top online consumer lenders.
    580
    $100,000
    4.99%–35.99% (fixed)
    LendingClub Personal Loan
    A peer-to-peer lender offering fair rates based on your credit score.
    660
    $40,000
    6.16%–35.89% (fixed)
    Upgrade Personal Loans*
    Affordable loans with two simple repayment terms and no prepayment penalties.
    620
    $50,000
    6.87%–35.97% (fixed)
    SoFi Personal Loan Fixed Rate (with Autopay)
    No fees. Multiple member perks such as community events and career coaching.
    680
    $100,000
    6.325%–15.615% (fixed)
    Credible Personal Loans
    Get personalized rates in minutes and then choose a loan offer from several top online lenders.
    Good to excellent credit
    $50,000
    4.99%–36% (fixed)
    Best Egg Personal Loans
    A prime lender with multiple repayment methods.
    640 FICO®
    $35,000
    5.99%–29.99% (fixed)
    Prosper Personal Loans
    Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.
    640
    $40,000
    6.95%–35.99% (fixed)
    FreedomPlus Personal Loans
    Consolidate debt and more with these low-interest loans. Cosigners welcome.
    640
    $35,000
    4.99%–29.99% (fixed)
    NetCredit Personal Loan
    Check eligibility in minutes and get a personalized quote without affecting your credit score.
    550
    $10,000
    34%–155% (Varies by state) (fixed)
    OneMain Financial Personal and Auto Loans
    An established online and in-store lender with quick turnaround times. Poor credit is OK.
    Varies
    $30,000
    16.05%–35.99%* (fixed)
    Monevo Personal Loans
    Quickly compare multiple online lenders with competitive rates depending on your credit score.
    580
    $100,000
    3.09%–35.99% (fixed)

    Compare up to 4 providers

    Step 2: Eligibility

    Lenders have set minimum eligibility criteria for their personal loans. While it varies by lender, many require borrowers to meet similar baselines, including:

    • Age. You’ll need to be at least 18 in most states, but some states require you to be 19 or older.
    • Income. You may need to earn over a certain amount to be eligible to apply for a loan. Your lender should list any annual income requirements.
    • 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.
    • Residency. Most lenders will require you to be a US citizen, a permanent resident of the US or on a long-term visa in the US.
    • Credit score. Although online lenders weight credit score differently than traditional lenders like banks, you’ll still have to meet a minimum credit score in order to qualify for many personal loans.

    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: 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. You can browse a list of documents and information required to complete the personal loan application on our review pages and on the lender’s website.

    You can expect lenders to ask for these pieces of information in order to process your application.

    • Government 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, 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: Approval

    Some lenders can give you an answer instantly while others may take a few days or weeks to approve you. There are two forms of approval: full approval or conditional approval.

    Conditional approval usually takes less time because the lender is simply assessing your strengths as a borrowing. 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 have 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: Loan funding

    Your loan can be funded in a number of ways depending on the loan type and purpose. 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 as well.

    If you’re borrowing an unsecured personal loan, the funds will be sent to the bank account you provide 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 in order to reduce your interest rate.

    Step 6: Repayment

    Most repayment terms are monthly. Some lenders only function online and so 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: Loan closure

    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 if you’re getting close to paying off your loan. This is to ensure the loan will be closed when you make your final payment and you won’t be charged any unexpected interest.

    4 common personal loan traps

    • 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.
    • 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 of the money you qualified for if your loan comes with an origination fee: A $1,000 loan with a 10% origination fee only gets you $900.
    • 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 insure that they get as much of a return on your loan as they would have if you stuck to the whole term.
    • 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 large 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 acredit 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.

    Frequently asked questions

    Was this content helpful to you? No  Yes

    Ask an Expert

    You are about to post a question on finder.com:

    • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
    • finder.com is a financial comparison and information service, not a bank or product provider
    • We cannot provide you with personal advice or recommendations
    • Your answer might already be waiting – check previous questions below to see if yours has already been asked

    Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms and Conditions and Privacy Policy.

    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.

        Cheers,
        Anndy

    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.

        Cheers,
        Harold

    US Personal Loans Offers

    Important Information*
    Even Financial Personal Loans

    Get connected to competitive loan offers instantly from top online consumer lenders.

    Prosper Personal Loans

    Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.

    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.

    Go to site