How to Apply for a Personal Loan

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 simplify and ease the process of getting a personal loan, no matter what you need it for.

There are five steps to applying for a personal loan:

We'll go into these in more depth below. But first, the basics.

What is a personal loan?

When a bank or other financial institution lends you money to make a major purchase or refinance existing debt, it's a personal loan. You sign a promissory note to repay the loan at an interest rate set by the bank. Personal loans are typically repaid in monthly payments. There are two types of personal loans:

• Unsecured personal loan: Your signature on a promissory note is all that is required to receive the funds.
• Secured personal loan: You put something of value up as collateral. If you fail to make loan payments, the lender can take possession of the collateral, sell it, and recoup some of its losses.

Decide how much you need to borrow

The first step in applying for a loan requires you to estimate how much money you'll need. 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).

Read more: How Much Personal Loan Can I Get?

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.

What will your monthly payments be?

Most loans have the same monthly payment every month, so you have no surprises. There are a couple things that determine your monthly payments:

• Loan term: The loan term is long you'll have to pay back the loan. If you have more time to pay off the loan, you'll make smaller monthly payments. But the longer you owe money to your lender, the more you pay in interest.
• Interest: All personal loans charge interest, just like credit cards. Personal loan interest rates vary from loan to loan -- you might see rates from below 5% to 35% or higher. Generally, if you have a healthy credit score, you'll get a good personal loan interest rate.

Use the calculator below to estimate the monthly payments for different loan amounts, interest rates, and more.

Check your credit score

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.

Read more: What Credit Score Do I Need for a Personal Loan?

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.

Here's our pick for the best lenders by minimum credit score

• 579 or lower: Best personal loans for poor credit
• 580–669: Best personal loans for fair credit
• 670–739: Best personal loans for good credit
• 740 and above: Best personal loans for excellent credit

How to check your credit score

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 and credit history online for free through a variety of different services. For example, through annualcreditreport.com, you can order a free credit report from each of the "big three" credit reporting agencies -- Experian, TransUnion, and Equifax. Go over each report separately as what is reported to each one may be different.

How to raise your credit score

Raising your credit score is an easy way to 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:

• Pay off debt, especially credit card debt.
• Make all your payments on-time.
• Don't apply for any new credit cards or loans (until you've finished this personal loan application).

Check our guide to how to build credit fast for more information on raising your credit score before you apply for a loan.

How to qualify for a loan

There's more to qualifying for a loan than having a high credit score. Lenders also look at your income and debt-to-income (DTI) ratio. We'll break it down for you.

Income

You'll need to show a lender you have a dependable income. Let's say you own a carpet installation business and some months are busier than others. Provide income records for the past two or three years to give the lender a fair sense of your "average" income.

If you've changed jobs frequently, be prepared to explain your situation. For example, if you're a nanny who has worked for several families over the past three years, have your income statements together to show the lender you've stayed in the same field during that time.

Control your DTI ratio

Your debt-to-income (DTI) ratio is the amount of money you owe in relation to the amount of money you earn. To calculate your DTI ratio, lenders add up your fixed monthly debts (such as rent or mortgage, car payments, HOA payments, child support, alimony, credit card payments, and payments on other loans), then they divide that number by your monthly income to come up with a DTI ratio.

Let's say your fixed monthly bills come to $3,000 per month and you gross income (the amount earned before taxes and deductions) totals $9,000 per month. You divide $3,000 by $9,000 to come up with a DTI ratio of 33%. ($3,000 ÷ $9,000 = 0.33). A DTI ratio of 36% or less is considered good. When a DTI ratio is higher, lenders begin to worry that you might have more debt than you can reasonably handle.

If you calculate your DTI ratio and learn it's too high, here are three steps that can help bring it down:

1. Make more than the minimum payment on the debt with the highest balance. Once you've paid it off, start on the debt with the next highest balance. Be sure to keep making at least the minimum payment on your other debts.
2. Use a balance transfer to a credit card with a lower interest rate. You'll still have the debt but the lower rate will allow you to pay it down faster.
3. Do not take on any new debt as you work to lower your DTI ratio.

Shop around for a personal loan lender

To get a loan that works for you, it's important compare multiple lenders. There are plenty of quick and easy online loans available, as well as loans from brick-and-mortar institutions.

Start by looking for lenders that fit your situation. Some lenders specialize in specific loan types, like renovation loans or medical loans. Others specialize in specific offers, like low-interest personal loans. For example, here are three types of personal loans:

Home improvement: Loans for people looking to make upgrades to their homes. A home improvement loan can be a good idea, particularly if the upgrades increase the value of the property.

Debt consolidation: Loans for those who wish to consolidate several high-interest debts into one loan with a lower interest rate. Debt consolidation loans can be an effective way to pay debt off at a faster clip and improve your credit score.

Peer-to-peer lending: Loans for people who need an alternative loan source. This may be someone who is self-employed and has trouble proving their income, or it could be someone with poor credit who's having trouble securing a traditional personal loan. How this loan is used determines whether it's a good idea.

How to compare lenders

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.

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 the annual percentage rate (APR) for different loans 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.

Note: If you're unemployed, you can still qualify for a personal loan. For information on what counts as income on a loan application, check out our guide to getting a loan while unemployed.

Do you need a cosigner?

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.

Do you need collateral?

Most personal loans don't require collateral -- the lender can't take your car, house, or other possessions if you can't pay the loan. (But your credit score and financial health will suffer if you miss payments, so it's best to only take out an amount you can pay back.)

Similar to a cosigner, collateral can help you qualify for a loan if your credit history isn't perfect. Examples of collateral include a car, a house, or a savings account. If you think you may need collateral, you'll need to look for lenders offering a loan type called a secured loan.

Submit your loan application

After deciding on a lender, it's time to apply for a loan. Most lenders allow you to apply for a loan online.

Before applying, gather these documents that you'll be asked for:

• Proof of identification
• Proof of address
• Proof of income (W-2s, 1099s, tax statements)
• List of your monthly debts
• Sometimes, you'll be asked to explain what the loan is for, although this is not the norm

The lender will also check your credit and consider relevant factors, such as job stability, 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 its decision. If the lender needs more details or further investigation into your financial situation, you may have to wait several days to find out if the loan is approved.

Wait for funding

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. The release of funds can take anywhere from one day to two weeks, depending on the lender. If you need the money quickly, be sure to ask the lender how long it takes to fund an approved loan before applying.

When you get a personal loan, you receive all the money you're borrowing right away (usually deposited into your bank account). Then, you can use the money from a personal loan for anything you want -- from home improvements to paying off credit card debt.

Read more: How Long Does It Take to Get a Loan?

Bottom Line

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.