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

Find out how a personal loan works every step of the way.

Looking to apply for a personal loan but want to know more about the process? Find out how they work and how you can apply. Whatever you’re looking to take out a personal loan for – to finance a new or used car purchase, consolidate debt or even cover wedding costs – there are a variety of personal loans to choose from. Use the guide below to help you choose the right one for your needs and financial situation.



You could borrow up to $35,000 for a variety of purposes, with rates starting from 5.99%–35.99%.

  • Recommended Credit Score: 640 or higher
  • Minimum Loan Amount: $2,000
  • Maximum Loan Amount: $35,000
  • 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.

    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: Comparison

    Finding the right personal loan is the first step of the process. Choosing a loan type depends on what your funding needs are. Here is a breakdown of some of the main types of personal loans available:

    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?

    Compare your personal loan options

    Rates last updated April 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
    Even Financial Personal Loans
    Get connected to competitive loan offers instantly from top online consumer lenders.
    4.99%–35.99% (fixed)
    Monevo Personal Loans
    Quickly compare multiple online lenders with competitive rates depending on your credit score.
    3.09%–35.99% (fixed)
    Upgrade Personal Loans*
    Affordable loans with two simple repayment terms and no prepayment penalties.
    5.96%–35.97% (fixed)
    Borrow only what you need for debt consolidation, home improvements and more — with APRs based on overall creditworthiness.
    5.99%–35.99% (fixed)
    LendingClub Personal Loan
    A peer-to-peer lender offering fair rates based on your credit score.
    5.98%–35.89% (fixed)
    CompareFirst Personal Loans
    An easy-to-use loan connection service geared toward introducing first-time borrowers to affordable personal loans.
    2.99%–36% (fixed)
    Best Egg Personal Loans
    A prime lender with multiple repayment methods.
    5.99%–29.99% (fixed)
    FreedomPlus Personal Loans
    Consolidate debt and more with these low-interest loans. Cosigners welcome.
    4.99%–29.99% (fixed)
    Laurel Road Personal Loans
    Get a personal loan with no application or origination fees and a rate discount for autopay.
    5.5%–11.74% (fixed)
    LendingPoint Personal Loans
    Get a personal loan with reasonable rates even if you have a fair credit score in the 600s.
    15.49%–34.99% (fixed)
    NetCredit Personal Loan
    Check eligibility in minutes and get a personalized quote without affecting your credit score.
    34%–155% (fixed)
    OneMain Financial Personal and Auto Loans
    An established online and in-store lender with quick turnaround times. Poor credit is OK.
    typically around 18.49%* (fixed)

    Compare up to 4 providers

    Step 2: Eligibility

    Lenders have set minimum eligibility criteria for their personal loans. This can include any of the following:

    • Age. You will need to be 18 or older to apply for a loan in most states. 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. Check with the lender for 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.

    However, even if you meet the minimum requirements for a loan you won’t be approved unless you can prove you can afford the repayments. Lenders determine this by looking at your income, your debts and the stability of your employment.

    Step 3: Application

    The application process for a personal loan differs between lenders. Generally, you will have the option of applying online, in-branch (if the lender has branches) or over-the-phone. You can find a list of documents and information required to complete the personal loan application on our review pages and on the lender’s website. Here’s a general list of what may be required when applying for a personal loan:

    • ID. You will need to provide your driver’s license, passport or another form of government-issued identification.
    • Proof of income. Depending on the lender you may need to provide three to six months of pay stubs, bank account statements and/or two years’ of tax returns if you’re self-employed.
    • Other financial documents. If you have other debts, such as loans or credit cards, you may need to provide statements from those accounts.

    Online applications usually take just a few minutes to complete if you have all your information ready.

    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 but is given pending more information from you, such as additional pay stubs or documents relating to your assets or debts. Lenders may just ask for this information and not offer any conditional approval. This is to help them make a more informed lending decision.

    Full approval is given when you have supplied sufficient information for the lender to make a decision on your application.

    Step 5: Loan funding

    Your loan can be funded in a number of ways depending on the type of loan it is and what you’re using it for. For example, when you take out a car loan the lender may pay the car seller directly. This is often the same case with a debt consolidation loan as well, with the lender directing funds to your debtors directly rather than to you.

    If it’s an unsecured personal loan, the funds will be sent to the bank account you select. Some lenders can transfer funds on the same day you’re approved while others might take a few days following approval.

    Step 6: Repayment

    Most repayment terms are monthly. When choosing your repayment structure, you may want to consider additional and early repayments.

    • Find out if your lender will charge fees for additional repayments.
    • Check if your lender has restrictions on how much you can repay extra per year (fixed rate personal loans may have this).
    • If you’re planning to repay your entire loan balance early, check if there is a penalty for that.

    Step 7: Loan closure

    If you’re simply making your repayments as set out in your loan contract, then your loan should be closed following your final repayment. However, if you are 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.

    Watch out for these four traps when taking out a personal loan

    • Insurance. Some lenders try to stick on life or unemployment insurance policies right before you’re about to sign your loan documents. While having insurance can be beneficial, policies can also be expensive and 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. Many don’t charge prepayment penalties, so you might not have trouble avoiding this one.
    • Precompute interest. This type of interest is added to your loan balance before you start making repayments, rather than accruing over time. Precompute interest means you can’t save on interest if you repay your loan early and essentially acts like a built-in prepayment penalty.

    Frequently asked questions about how personal loans work

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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?

      • Staff
        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.

      • Staff
        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*
    Even Financial Personal Loans

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


    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)

    Borrow up to $100,000 with a competitive APR and no fees.

    Go to site