When you’re in need of money for a large purchase or unexpected expense, you may be considering a personal loan. Private loans are a type of installment loan, which means you borrow a certain amount of money and then make fixed payments over a set period.
If you have good credit, you may be able to qualify for a low-interest private loan from a credit union, bank, or online lender. If you have fair or bad credit, you could still be able to get a loan, but you’ll likely pay a higher interest rate.
Here’s a step-by-step guide on how to apply for a personal loan to help you compare personal loans and find the best one for your needs.
1. Check Your Credit Score
Your credit score is vital in determining whether you’ll qualify for a loan and, if so, what interest rate the lender will offer you. A higher score indicates to lenders that you’re a lower-risk borrower, which could lead to a lower interest rate on your loan.
If you don’t know your credit score, you can get a free credit report from each of the three major credit bureaus – Experian, Equifax, and TransUnion – once a year at AnnualCreditReport.com.
2. Decide How Much You Need to Borrow
Before you start shopping for a personal loan, you must know how much money you need to borrow. The amount you’re eligible to borrow will be based on factors like your credit score, income, and debts.
If you need help calculating how much you can afford to borrow, consider using a personal loan calculator. This tool can estimate your monthly payments and the total cost of the loan based on the interest rate and loan term you enter.
3. Shop Around for the Best Personal Loan
Once you know how much you need to borrow and your credit score, you can start shopping around for personal loans. You can consider a few different types of lenders, including banks, credit unions, and online lenders.
If you’re considering a bank, start by checking with your primary bank or credit union to see if they offer personal loans and their terms. If you don’t have a relationship with a bank or credit union, you can compare personal loans from various online lenders.
When you’re comparing loans, be sure to look at the annual percentage rate (APR). The APR includes the interest rate plus any fees charged by the lender. Your APR is the actual cost of the loan, so it’s essential to compare APRs when shopping around.
4. Read the Fine Print
Once you’ve found a personal loan with terms that work for you, it’s essential to read the fine print before applying. Some personal loans come with origination fees, which the lender charges for processing the loan.
Origination fees can range from 1% to 8% of the loan amount, so be sure to factor this into your decision. You may also want to consider a personal loan with no origination fee, even if it has a slightly higher interest rate.
5. Apply for the Loan
When you’re ready to apply for a personal loan, you’ll need to provide personal and financial information to the lender. This information may include your name, address, Social Security number, and income report (often your payslip or bank statement).
The lender might ask you to provide information about your debts, including credit card balances and other loans you’re currently paying off. The lender will use this information to decide whether you qualify for the loan and, if so, how much they’re willing to lend you.
6. Expect a Hard Inquiry on Your Credit Report
When you apply for a personal loan, the lender will likely make a hard inquiry on your credit report. This inquiry can temporarily lower your credit score by a few points.
However, if you have a good credit history, the impact of a hard inquiry is typically minimal, and your score will rebound soon after. If you have bad credit, a hard inquiry may not impact you since your score is already low.
7. Get Your Money
If the lender approves your application, they will send the money to your bank account within a few days. Once you have the money, you can use it for any purpose you need.
Just be sure to make your loan payments on time. If you miss a payment, your lender might charge you a late fee. More importantly, the lender might report your late payments to the credit bureaus, damaging your credit score.
8. Pay Off Your Loan
Personal loans typically have terms of three to five years. This means you’ll have a set repayment schedule, with fixed monthly payments, for the life of the loan.
When making your monthly payments, remember that a portion of each payment will go towards the interest, and the rest will go towards the principal or the amount you borrowed.
If you have a personal loan with a variable interest rate, your monthly payments may go up or down, depending on changes in the market. However, your monthly payments will never go below the minimum payment amount.
Hopefully, it’s clear what the key steps to take when applying for a personal loan are. The next step is to actually do it! Gather all of your information and get started with your application process. We hope this guide will help you get started.
Another quick tip when applying: If you want to get the best rates on your loan, make sure your application is as complete and as accurate as possible. A detailed and honest application shows the lender that you are serious about borrowing money and will help them in making an informed decision about whether or not to lend you the money