How to get a personal loan

Personal loans are useful financial tools that can be used to cover personal expenses such as home repairs, medical bills, and large purchases. But before applying for a loan, it’s smart to compare options from several lenders and know what’s involved in the approval process. In this guide, we’ll outline the approval process for personal loans.

Key takeaways:

• Personal loans vary in length, amount, APR, and requirements for credit score and collateral. To find a loan that fits your needs, you’ll want to look at several lenders and explore all your options.
• When applying for a personal loan, you’ll need to supply proof of your identity, address, and income.
• To get approved for a loan, it can help to raise your credit score, apply with a cosigner, supplement your income, or ask for a smaller loan amount.

How getting approved for a personal loan works

To get approved for a personal loan, you’ll need to fill out an application. The eligibility criteria can vary depending on the type of loan and lender, so it’s important to do your research and compare lending options online before applying. After you apply, the lender will let you know whether you’re approved. Sometimes the approval process is instant, while other times, it may take a few days.

If you get approved, you may receive the funds quickly so that you can start covering expenses. Like any loan, personal loans require you to pay back the money you borrow in addition to the interest your lender charges.

What is interest?

Interest is the amount of money you pay your lender to borrow their money. This is in addition to paying back the original loan amount.

There are many different personal loans available, and many lenders to choose from. Here’s some help with exploring your options.

What do I need to consider when choosing a personal loan?

Here are some factors to consider and compare when you look at personal loans.

Loan term

The loan term is the amount of time you must pay back the money you borrow. Some loans have terms of one year or less. Other loans can be repaid over a period of years.

Annual percentage rate (APR)

The annual percentage rate includes both the interest on your loan and the fees your lender charges. This is the most accurate measure of what a loan will cost you.

The APR on a personal loan can vary greatly from one lender to another. Some large banks will offer APRs of less than 10 percent to favored customers. Payday loans, which are often the most expensive choice, may charge APRs of over 400 percent.

Loan amount

The amount of your loan depends on the expense you want to cover and the total your lender approves.

Credit score requirements

Your credit score is a major factor in determining what loans you qualify for, and what the APR on them will be. The higher your credit score, the better.

What is a credit score?

Your credit score is a number between 300 and 850 that gives businesses an idea of how likely you are to make payments on time.

Collateral

Personal loans come in two types: secured and unsecured. A secured personal loan requires you to put up collateral. If you do not pay back the loan, the lender can sell your collateral to make up for what you owe them.

What is collateral?

Collateral is something of value that you agree to give your lender if you fail to make your payments on time.

An unsecured personal loan does not require collateral. However, its interest rate may be higher because the lender is taking more risks.

Requirements to get approved for a personal loan

Here are some requirements you may need to meet to get approved for a personal loan:

• Credit score: As mentioned before, your credit score can have an impact on what loans you qualify for. A higher score indicates a strong history of repaying debts and is viewed more favorably by lenders.
• Income: A borrower’s regular income is a strong indicator of their ability to repay a loan. Lenders typically prefer borrowers with a stable, reliable source of income. You may be able to provide pay stubs, bank statements, or tax returns as proof of income.
• Debt-to-income ratio: This ratio, expressed as a percentage, compares a borrower’s monthly debt payments to their gross monthly income. A lower ratio suggests that you have a good balance between debt and income, making you appear less risky to lenders. Many lenders prefer a DTI ratio below 40%.
• Employment history and education: Some lenders have more eligibility criteria and may consider your education or employment history when deciding whether to approve you.

How to choose the right personal loan

Now that you know what to look for in a personal loan, how do you choose the right one? You might start the process by talking to several lenders you trust. They can ask you questions about your finances and help guide you to loans that fit your needs. Additionally, they can give you an idea of the options you may get approved of. Don’t be afraid to ask any questions you may have. A good lender will be happy to explain what to expect if you borrow money from them.

Requesting prequalification on a personal loan is a good way to tell if you’re likely to get approved. Many lenders allow you to request prequalification online. This will not affect your credit score. Once you’ve decided on a loan that meets your needs and has the right eligibility criteria, it’s time to submit a formal loan application to the lender of your choice.

What documents will I need to get approved for a personal loan?

When applying for a personal loan, lenders usually require you to provide the following information and documents to get approved:

• Your Social Security number or government-issued ID
• Proof of address, such as a utility bill (light, gas, etc.)
• Proof of income, such as your paystubs or W-2
• Your employer’s contact information
• A list of your monthly debt payments

Tips for getting approved for a personal loan

If your first loan application wasn’t successful, don’t give up. You can work on improving your chances before you try again. Here are some strategies that may help you get approved for a personal loan.

Raise your credit score

Many lenders require a minimum credit score of 610 to 640 for personal loans. If your credit score is lower than this, you can start bringing it up by making sure you pay all your bills on time every month. It’s also a good idea to check your credit report for free at AnnualCreditReport.com. If you find any errors that could affect your credit score, be sure to report them so they can be corrected.

Apply with a cosigner

If you have a friend or family member with excellent credit, consider asking that person to be a cosigner on your loan. By cosigning your application, they agree to pay back your loan if you do not make the payments. A lender may be more likely to approve your application if someone with a high credit score cosigns for you.

Supplement your income

When deciding whether to approve your loan application, lenders will want to know your annual income. You may be able to earn more money by taking a part-time job in addition to your regular work, or by starting a side hustle. Be sure to include your income from all sources on your personal loan application.

Ask for a smaller loan

When applying for a loan, be realistic about how much money you need. You may be able to qualify for a smaller loan even if you’ve been turned down for a large one.

Oportun: Affordable lending options designed with you in mind

Now that you understand how to get approved for a personal loan, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

• Personal loans
• Secured personal loans
• And more!

Sources

WalletHub. Types of loans

Investopedia. Personal loan: Definition, types, and how to get one

The Balance. The basics of personal loans

Experian. What’s a good interest rate on a personal loan?