How to apply for a personal loan

An unsecured personal loan is a handy tool to cover nearly any expenses. However, getting approved for one can require good credit, and rates can get high, so it’s important to compare lenders when you’re applying for a personal loan. At the end of 2022, the average rate on a personal loan was 11.23%, according to the Federal Reserve.

Here’s what to expect when you complete an application, and some things to do before you apply to smooth out the process.

7 steps to apply for a personal loan

If you’re new to borrowing, or you’ve never had a personal loan, here are some simple preparations.

Step 1: Find the right type of loan

There is a wide range of personal loan types that are appropriate for different borrowers. While these four lists are the most common, personal loans are generally available for almost any purpose.

• Unsecured personal loans. A loan without collateral for general personal use. This is the most common type of personal loan.
• Secured personal loans. A loan backed by collateral for general personal use.
• Debt consolidation loans. A consolidation loan is used to pay off current debts for a better rate and easier repayments.
• Medical loans. Some lenders offer special financing options for borrowers to help cover medical expenses.

Step 2: Decide on the right type of lender

Banks and credit unions tend to offer a more hands-on experience. Current customers might also get discounted rates. But they typically take much longer to process your application than online lenders. They also require more documents and the application itself can be more complicated.

Consider what you value the most when deciding where to start your search: assistance or speed.

Step 3: Check your credit score

Since most personal loans are unsecured, lenders typically require a decent credit score (above 670) and a clean credit history. So check your credit score before you apply — the better your score, the better your chance to be approved for the loan amount you want at a competitive rate.

In 2021, the average credit score was 716, as reported by FICO. Credit scoring models vary, and FICO breaks down credit scores into four categories:

• Excellent credit: 740+
• Good credit: 670 to 739
• Fair credit: 580 to 699
• Poor credit: Less than 579

Step 4: Check the lender’s requirements and compare

Don’t waste time applying for a loan that you’re ineligible for. Before you consider a lender, check their eligibility requirements. Typical requirements include:

• Credit Rating: Varies, but the lowest average score is 640 to 670
• Annual Income: Typically $25,000 or more
• Credit History: You will usually need a credit history of at least three years to qualify
• Debt-to-income ratio: Most lenders prefer a debt-to-income (DTI) ratio of 43% or lower

Once you know requirements, you can start comparing lenders by their features and flaws.

Step 5: Gather your documents and information

Having the required documents on hand can make your application go a lot faster — the sooner you can get them in, the sooner you can get approved. Ask your lender which documents it requires before you get started. Typically it includes:

• State-issued ID. Lenders generally accept valid driver’s licenses or passports.
• Proof of employment. Generally lenders ask to see your last three pay stubs or a W-2 form.
• Proof of address. Many lenders accept utility bills, such as a recent electricity bill or phone bill.
• Bank statements. This shows lenders how much money you have and can act as proof-of employment if you work for yourself.
• Social Security number. Your lender needs a SSN to check your credit score.
• Employer’s contact information. Some loan applications ask for your company’s contact information — and sometimes information about your former employers.
• Contact info and references. Lenders typically require a phone number, email and possibly a few personal references.
• Reason for borrowing. The lender will ask if you’re using the loan for debt consolidation, home improvement, etc.

Step 6: Apply for the loan

With all your ducks in a row, you can apply with the lenders that suit your lending needs and fit your credit rating. Many lenders now offer online applications, but a bank or credit union may require you to apply in person.

If you’re going for prequalification, you may see a potential offer within minutes of submitting your application.

Step 7: Accept or decline the offer

Remember that you aren’t obligated to accept an offer you don’t like or want.

Review the terms and conditions carefully. Check interest rates, fees, loan terms, hardship policies and payment options before signing any documents. Certain fees — like prepayment penalties or late fees — may not be listed until after you apply.

If you’re happy with the loan, accept the terms, sign the required documents and simply wait for funding.
How soon you get funding depends on the lender and your preferred method of delivery; direct deposit, mailed check or in-person hand off. You could see funds as soon as the next business day, or a few weeks.

Consider prequalifying before officially applying

Many lenders, including banks and credit unions, offer prequalification, or preapproval. This gives you a chance to view your potential rate and loan term based on the information you submit. It also gives you an easier way to compare: You can stack multiple offers against each other to find the best option before your credit score takes a hit.

Just remember that a prequalification offer isn’t finalized. Your lender may change your loan terms after doing a hard pull on your credit.

What happens next?

The application process may vary slightly from lender to lender, but generally they all follow a format and next steps:

1. Receive your loan funds. If you do decide to take out the loan, many lenders and banks require that you have a checking account to receive your funds via direct deposit, or they may send a check. Funding time varies by lender.
2. Spend your loan. In most cases, you are free to spend your loan funds on whatever you’d like, with the exception of college expenses.
3. Repay the loan. Once you get the loan, repayments will start soon after. Be sure to repay on time to avoid damage to your credit score. Some lenders offer autopay with a discount, typically 0.25% APR.

What if I get denied?

It can be disheartening to get denied for a loan, but you have the right to ask why you were rejected under the Equal Credit Opportunity Act, as stated by the Consumer Financial Protection Bureau. Typical reasons for a loan denial include a low credit score, not enough monthly income or a lacking credit history.

Knowing why you got denied is a good first step in preparing for your next attempt. If your denial was credit score related, consider adding a cosigner to your next application — a cosigner agrees to repay the loan if you’re unable, increasing your approval odds. Or if you can wait a while, find ways to improve your credit score.

5 best places to get a personal loan

• Online lenders: Best for fast, streamlined funding for all credit types
• Banks: Best for borrowing large amounts with excellent credit
• Credit unions: Best for low rates and flexible terms
• Peer-to-peer lenders: Best for investor-backed funding
• Connection services: Best for comparing your options when you don’t know where to start

Personal loans from online lenders

• Get your money as fast as one business day with minimal documents required

• Higher rates than banks and credit unions

Online lenders are generally the easiest type of lender to borrow from. You can often check your rates by filling out a quick online form, usually without affecting your credit score. If you like your offer, all you typically need to do is upload your most recent bank statements and pay stubs to verify your income. You can often get your funds as soon as the next business day.

These types of lenders are fast because they use algorithms rather than people to review your application. And they’re open to more credit types because they often consider factors beyond credit and income when you apply, like your level of education and length of employment. But they tend to have higher rates than banks and credit unions.

Personal loans from banks

• Borrow from a lender you trust and qualify for larger amounts

• Longer application with fewer options for borrowers with average credit

Banks might be a good choice if you’d prefer to keep all of your finances in one place or need to borrow more than $50,000 — where most online lenders max out. Some even offer loyalty discounts, so you could get lower rates if you’re already a customer.

But they can take a long time. While some banks like Discover have partnered with tech companies to speed up applications, many still rely on staff to underwrite loans — sometimes it can take weeks to process an application. And banks are generally risk averse, so you might have a hard time qualifying without excellent credit.

Local banks vs. big banks

If you want to borrow from a bank, think local. Large banks like Chase have started moving away from personal loans altogether — they’re just not that profitable. But you can usually find options at regional or even neighborhood banks.

Have bad credit? Check out local banks that qualify as a community financial development institution (CDFI). These aim to boost the economy in the local community and offer affordable financing options to all credit types.

Personal loans from credit unions

• Lower rates and friendly to most credit types

• Long application that requires you to become a member

Credit unions are nonprofit financial institutions owned by their members. They have lower overhead costs than banks, so they can often offer lower rates and fees compared to other lenders — especially if you have average credit.

The main drawback is that you have to become a member to apply, which usually involves opening a checking or savings account with a $5 balance. Some allow you to become a member during the application process, while others require you to apply for membership beforehand. And credit unions usually serve specific geographic locations, professions or employees of a company — so membership isn’t open to everyone.

Personal loans from peer-to-peer lenders

• Streamlined application with loans funded by individuals

• Can take longer than an online lender to receive funds

Peer-to-peer lending allows you to borrow from individuals rather than a financial institution, giving the potential for lower rates. These work a lot like personal loans from online lenders in most cases — both use similar technology to evaluate applications.

But since these loans are backed by individuals, it can take a little longer to get your funds. For example, it can take up to seven days to get a loan from popular peer-to-peer lender LendingClub.

Personal loans through connection services

• Prequalify for offers from multiple lenders

• Limited to connection service’s network of partners

A connection service allows you to prequalify and compare personalized offers from multiple lenders by filling out one online form. Most work with online and peer-to-peer lenders, though it’s possible to also get connected with banks and credit unions. These can be helpful if you’re new to personal loans or have difficulty qualifying with most lenders.

Connection services are generally free to use since they make money from the lenders in their network. But this can be a double-edged sword since you’re limited to comparing offers from the lenders they partner with. It can also be difficult to tell where your information is going when you fill out the online form. And many users complain about getting calls from lenders well after they’ve taken out a loan.

3 personal loan alternatives

Borrowing isn’t always the right option. If you’re not ready to commit to a loan — or still need to build your credit — consider these three alternatives:

• Savings. It might mean waiting, but saving money will be the least expensive option. By setting aside money each month in a savings account, you can earn interest rather than pay it — all while developing your budgeting skills.
• Pay advance. A pay advance can be borrowed through a dedicated app or offered directly by your employer. And while you may have to tip if you use an app, these are cheaper and faster than personal loans if you need to cover an emergency expense.
• Credit cards. It will typically have a higher APR than a personal loan, but a credit card can be a good option if you need to make a small purchase. However, check the rates before you apply: Credit cards have multiple fees that can add up quickly.

Competitive loan rates for all credit types

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Bottom line

Applying for a personal loan isn’t difficult if you prepare. And to get the best deal, learn more about personal loans so you can spot a lender that will meet your needs.