If you need to borrow money, you're likely wondering how to get a loan. You can get a personal loan from an online lender, credit union, or bank -- but how do you choose the best lender? And how do you apply for a loan, once you find the right lender for you? This step-by-step guide will help you navigate the process of getting a personal loan.
If you're new to borrowing money, you probably have a few questions about loans. Below, we've summarized the important points to know about personal loans. You can find out more about personal loans by heading over to our guide on how personal loans work.
There are five steps to applying for a personal loan:
We'll go into these in more depth below.
First, estimate how much money you'll need from a loan.
Some lenders only offer small loans (for example, under $1,000 or up to $10,000), and others specialize in large loans (nothing less than $5,000, up to $100,000 or more). If you know how much you need, you can immediately narrow your search to lenders with loan amounts that match your needs.
Generally, it's best to borrow the smallest amount possible when you get a loan. You'll pay interest on the amount you borrow -- so if you borrow more, you'll pay more in interest. Get a small loan, and you'll pay less in interest charges.
Different lenders have different minimum credit score requirements. Some of the best personal loan lenders will only offer you a personal loan if your credit score is near-perfect. Other lenders specialize in personal loans for bad credit.
Before going through the hassle of applying for a loan, check your credit score. You'll immediately know which lenders to consider -- and which to cross off your list.
Some credit cards and banks allow customers to check their credit score through the bank or credit card issuer's website. This is usually the simplest way to check your credit score. You can also get your credit score online for free through a variety of different services.
Your credit report contains the information that goes into calculating your credit score. If there's a mistake on your credit report, it could drag down your credit score. Correcting a mistake is simple: Just read through your credit report and report any mistakes you find, and the credit reporting agency will investigate those mistakes. You're legally entitled to one free credit report per year from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. This process can take over a month, so start early!
Raising your credit score can save you hundreds of dollars by helping you score a lower interest rate or a better loan. (If your credit score is already perfect, congratulations -- you can skip this step.)
Here are a few immediate steps you can take to boost your credit score before you get a loan:
Check our guide to how to build credit fast for more information on raising your credit score before you apply for a loan.
To get a loan that works for you, it's important compare multiple lenders.
Start by looking for lenders that fit your situation. If you need a place to start, check out our experts' favorite personal loan lenders:
Best lenders by minimum credit score
Best lenders by loan use
Once you've narrowed your search to a handful of lenders, the best way to compare loans is to get pre-qualified.
Getting pre-qualified for a personal loan is simple, and doesn't require any commitments on your end. Here's how it works:
Only compare loans with similar terms when deciding where to get a loan. Because fees and interest rates can vary so much, it's a good idea to look at different loans' annual percentage rate (APR) when comparing. The APR takes into account both the fees and the interest rate, so you get a better picture of what the loan actually costs.
There are two different types of interest rates: variable and fixed. Variable interest rates usually start low, but can change over the life of the loan. If you get a loan with a variable interest rate, your monthly payment may change from month to month. Fixed interest rates don't change -- and the monthly payment on fixed interest loans won't change either. Make sure you know which type of interest rate you prefer and only compare loans with that type of interest rate.
If you're having trouble getting pre-approved for a loan, you can ask a friend or family member with better credit to be your loan cosigner. If you have a cosigner, the lender will consider both you and your cosigner's credit scores and income instead of just yours.
As a result, a cosigner can make it easier to qualify for a personal loan. You also might get a lower interest rate with a cosigner than you would on your own.
Be careful, though. A cosigner shares the responsibility of paying back the loan. That means if you miss a payment, your cosigner's credit score will suffer. And if you don't pay back the loan, the lender can take legal action against your cosigner. Asking someone to cosign on a loan is not something that should be taken lightly.
After deciding on a lender, it's time to apply for a loan. Most lenders allow you to apply for a loan online.
To start, the lender will need your name, address, Social Social Security number, and details about your income. The lender will check your credit and consider relevant factors, such as how much you earn, to decide if you qualify for the loan. Then, the lender will either deny your loan or approve it.
In some cases, you'll get a decision very quickly -- or immediately -- after submitting your loan application. In other circumstances, the lender may want more info or more time before making their decision. If the lender needs more details or further investigation into your financial situation, you may have to wait several days to hear back to find out if the loan is approved.
Once your loan is approved, you'll have to agree to the interest rate and repayment schedule. Then, you'll sign a promissory note indicating you'll pay back the loan.
At this point, the lender will release the funds to you.
There are many personal loan lenders offering loans to people with all different credit scores. Even if you aren't a perfect borrower, you should be able to find a personal loan when you need the funds. The real question is: How can you get a loan that benefits you financially?
Rule number one when you apply for a loan is to only borrow what you need. In addition, make sure you don't take a loan without understanding the terms and you pay back the loan as due. If you follow this basic advice, getting a loan doesn't have to be hard.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.