How to Get Approved for a Personal Loan

There are many reasons for wanting to get approved for a personal loan. You may be looking to pay off high-interest credit cards, finance a dream vacation, or pay for a wedding. First though, you'll need to know how to get approved for a personal loan.

Whatever type of personal loan you need, and whether you apply through a bank, credit union or online lender, here's how to get approved for a personal loan.

And when you're ready to apply, check our list of top-rated personal loan lenders to find the right lender for you.

Improve your credit score

Before you apply for a personal loan, check your credit score. This is a three-digit number that lenders use to get a sense of how well you manage credit. A strong credit score means you're more likely to get approved for a personal loan. It'll also help you snag the best interest rates.

Here are some ways you can improve your credit score:

1. Pay down debts: Getting approved for a personal loan depends on a healthy debt-to-income ratio (DTI). DTI refers to the total of your monthly debt payments divided by your gross monthly income. If you're spending half of your income (or more) on debt payments, do your best to lower your monthly payments or increase your income.
2. Consolidate payments: Debt consolidation allows you to consolidate multiple loans into one new one, preferably with a lower interest rate. If you're slogging through making credit card payments but unable to pay off the balance, consider transferring the balance(s) to a 0% interest credit card that you can pay off before the promotional interest period is up.
3. Clear up mistakes: Go over every line of each of your credit reports, searching for inaccuracies. It's not unusual to find credit cards that were taken out by someone with a similar name, or balances you paid off years ago. Highlight each mistake and contact either the company that issued the account or the credit reporting company.
4. Use credit responsibly: Make all your payments on time, keep your debt at a manageable level, and don't apply for lots of new credit at once.

If you suspect you won't get approved for a personal loan due to bad credit, it's okay to wait until you are in better financial shape. Each time you apply for a loan, it counts as a hard inquiry on your credit report. Hard inquiries can cause a drop in your credit score, which will ultimately make it more difficult to secure loan approval. Work on your credit until you have a good or even an excellent score and so increase your chances of getting approved for a personal loan.

Prove you can pay it back

Ultimately, lenders want to know that lending you money is a safe bet. To get approved for a personal loan, you need to show that you can pay them back on time and in full.

If you're unemployed, check out our guide to getting a loan while unemployed for information on what to list as income on a loan application.

1. Show stable income: Any lender will want to be sure that you earn as much money as you claim to. If you work for a company, you should have your last three pay stubs and two years of W-2s to show. If you're self-employed, provide the lender with three months of bank account statements and two or three years of 1099s. Also, be prepared to show two years of tax returns if they ask for them (not all lenders will).
2. Show other sources of income: If you have other sources of income -- like royalties for artwork, alimony payments, an annuity, or annual financial gifts -- provide the lender with proof of that income. Dependable secondary sources of income can make getting approved for a personal loan easier.
3. Get a cosigner, if needed: In the event you can't qualify on your own, consider asking someone with strong credit to cosign the loan. Remember, the cosigner will be legally responsible for paying the debt if you fail to do so, meaning you should think long and hard about asking someone to take on that responsibility. It also means that you owe it to the cosigner to make every payment on time and in full. If your credit is so/so and you can't find a cosigner, consider a personal loan for fair credit.

Find the right lender for you

As you learn how to get approved for a personal loan, you will discover that the type of loan you take out and the kind of lender you work with can determine whether or not you get approved. Take time to find what works best for you and your financial situation.

Loan type

One of the things you'll need to decide is the type of loan you're interested in. Here we cover unsecured, secured, variable-rate, and fixed rate loans.

1. Unsecured personal loans are not backed by collateral. Unlike your home or auto loans, the bank does not have the ability to repossess anything if you stop making payments. For that reason, the interest rate is usually higher on these loans. Those with credit scores in the high 600s and 700s have the easiest time getting approved for an unsecured personal loan.
2. Secured personal loans are backed by collateral, something the lender can take possession of if you fail to pay the loan as agreed. It's important to note that not every lender offers secured personal loans, but those that do will allow you to back the loan with an asset like a certificate of deposit (CD) or savings account. The best aspect of secured loans is that they're offered at lower interest rates (which will lead to a lower monthly payment), though be aware that you pay for the lower rate with the risk of losing your collateral. Important note: Don't be fooled by car title loans (secured by your car title) and payday loans (secured by your next paycheck). These may be marketed as "secured" loans, but are not in the same category as a secured loan offered by a bank or credit union. See our section on payday loans below for more.
3. Variable-rate loans come with interest rates and payments that can change over the life of the loan.
4. Fixed-rate loans are loans with interest rates and payments that remain the same throughout the life of the loan. Before getting approved for a personal loan, decide if you prefer a variable or fixed rate.

Lender type

The type of loan you're interested in may help you narrow down which lender you want to get approved for a personal loan with. For example, if you know that you want a variable-rate loan, that fact will help you narrow down your options. Personal loan lenders include banks, credit unions, online lenders, and payday lenders. Here's a breakdown of each:

1. Banks: If you already have a relationship with a bank, you may find the application process is smoother. Plus, working with your home bank will sometimes score you a small interest rate discount. Banks offer more competitive interest rates than many other lenders, and they are able to get funds into your account in two to three days. The downside is that you generally need good to excellent credit to qualify for a bank loan. Plus, that loan may come with an origination fee.
2. Credit unions: Having an established relationship with a credit union can ease the process of getting approved for a personal loan. Plus, as a member, you may be eligible for a discounted interest rate. Credit unions tend to offer very competitive interest rates and lower fees than other lenders. Some credit unions make loans available to members with lower credit scores. Negatives include the fact that you normally have to be a member of a credit union in order to apply for a loan.
3. Online lenders: As long as you have access to the internet, you can apply from anywhere, and loan decisions can be fast. The cons of getting approved for a personal loan by an online lender include interest rates that vary widely depending upon the lender. On top of that, most online lenders charge an origination fee.
4. Payday lenders: Payday lenders should be avoided at all costs. Getting approved for a personal loan from a payday lender is astronomically expensive. Payments are typically due on your next payday, loan amounts are typically small, and interest rates are extremely high. These loans are one of the most expensive ways to borrow money and are banned in some states. See our section on payday loans below to understand why.

Never talk yourself into getting approved for a personal loan you know will be bad for you financially. Rather than pay sky-high interest on a loan from a lender with low credit standards, take the time required to get your credit in order. The worst thing you can do is dig yourself into a deeper hole by taking on a loan that's wrong for you and end up with a monthly payment you cannot afford.

Beware payday lenders and payday loans

We've included payday loans here because they exist and if you are desperate, they may feel like the only option. However, the interest rates on these loans -- which range from about 390% to 780% -- are so high that it can become almost impossible to pay them back.

Payday lenders may be legal in some states, but there is no way to argue that the APRs they charge are legitimate. In fact, a loan shark is likely to charge a lower APR (although visiting a loan shark is an even worse idea). If you are ever tempted to take out a payday loan, you are better off seeking a personal loan for bad credit.

What is the maximum you can borrow?

The maximum amount you can borrow for a personal loan is based on how high your debt-to-income ratio will be after the loan is made.

Let's say you're looking for a loan with a monthly payment of $495, and you already have $1,700 in debt payments every month. The lender will add the payment of $495 to your other monthly payments of $1,700, for a total of $2,195. Now, let's imagine you have a monthly income of $5,000. The lender will divide $2,195 by $5,000 -- and come up with nearly 44%. Chances are, a credible lender is not going to make a loan that pushes you into a DTI of 44%. You should aim for a DTI of 40% or below.

If getting approved for a personal loan is going to push you over that line, you should consider adjusting the amount, paying down debt, or waiting until you are earning more money.

What's the difference between pre-qualification and pre-approval?

If a lender tells you that you're pre-qualified for a loan, that means it thinks you will get through the approval process. If a lender tells you you're pre-approved, it has offered a conditional commitment to give you the loan. Beware: Some lenders use these terms interchangeably. If someone tells you that you're either pre-qualified or pre-approved, ask them precisely what they mean.

The process generally looks like this:

1. You're pre-qualified for a loan and get an idea of how much you might borrow
2. You provide enough financial information to become pre-approved
3. The lender runs a hard credit check and tells you if you're definitely getting the loan

During pre-qualification, the lender gives you an idea of how much you will qualify for and what the interest rate may be. Pre-approval is when the lender is likely to ask you for documentation regarding employment, income, and identification. As long as nothing negative arises before you close on the loan, you should be good to go.

What happens after pre-qualification?

After pre-qualification, you should have a good idea of what loan you want to take out and what the rates and fees will be.

As it turns out, getting approved for a personal loan may be the easy part. Before you sign loan documents, make sure you understand what you're signing. The interest rate you are originally quoted may not truly reflect how much you will pay for the loan. The APR, on the other hand, better reflects how much you will pay annually because it includes things like origination fees, processing fees, and document preparation fees. If you don't understand the fees, ask about them. If your credit score is high enough, you may be able to get a reduction.

How does a personal loan affect your credit score?

If you make your personal loan payments on time every month, your credit score will climb. In addition, if you use a personal loan to pay off high-interest credit cards, you're likely to experience a rise in credit score. But in the short term, your credit will dip due to the hard credit check required for loan approval.

Perhaps the most important thing to remember when it comes to getting approved for a personal loan is the value of legwork. Take time to shop around to get approved for a personal loan that fits your financial situation, is worth getting and will benefit you the most. The fact that you asked how to get approved for a personal loan means you're going in armed with knowledge.