A personal loan is a type of financing you can obtain from banks, credit unions, and online lenders.
Personal loans are term loans, meaning you borrow a lump sum up front with a fixed rate, then you pay back fixed monthly payments for the loan term which usually ranges from two to seven years.
No matter the reason why you might want a personal loan, the process of getting one doesn’t need to be complicated.
There are multiple ways that you can take out a personal loan. A common option is using an online lender.
Online lenders tend to make it easy to apply for a personal loan. In some cases, you may be able to receive the funds directly into your bank account as soon as the same day.
Furthermore, most online lenders will first do a soft credit inquiry to see if you are pre-approved, allowing them to show you estimated loan offers and interest rates. If you see an offer you like, you can then start the full application process for final approval.
There are other personal loan options as well, including banks and credit unions. If you work with a traditional bank, you may have to go in person to get the loan, though some offer online loan applications as well.
Similar to the process with online companies, make sure to compare options from multiple banks or credit unions to ensure you find a loan with low rates.
Most personal loans are unsecured, meaning you don’t need collateral to get approved.
The first step in the process usually involves checking your credit report. Even if your credit check shows your credit history isn’t perfect, you may still be approved, but you likely won’t be eligible for the lowest possible interest rates.
In fact, you may want to check your credit score before you even start applying for a personal loan. That way, you will know what type of personal loan you should be looking for. Most lenders have minimum credit score requirements and there are lenders for people with good, fair, or bad credit.
If you don’t qualify for a personal loan because of your credit score, you might then apply for a secured loan requiring collateral. Another option would be applying with a co-signer.
If you have existing debt—especially credit card debt that you don’t plan to pay off with your personal loan—it’s going to affect your chances of getting a personal loan.
Lenders look at your credit utilization rate, and it’s also a big factor in your credit score. If lenders see that you already have a lot of other debt that requires payments, they may be wary of lending you money thereby putting you more in debt.
Most lenders will also ask for some personal loan documentation during the application process.
This could include identification, such as a passport or driver’s license; proof of income, such as your W-2s, pay stubs, tax returns; and proof of assets, such as your bank statements. You may also have to verify your address and submit your social security number.
The time it takes to get approved for a personal loan varies on the lender. If you apply for an online loan, they may issue an instant decision and your loan may be disbursed directly into your bank account as soon as the same day.
Getting your personal loan can take longer at a traditional financial institution. It may take several days for an approval to be issued, and even longer for the funds to be disbursed.
Before accepting a personal loan, consider the fine print. For example, are there loan origination fees, prepayment penalties, or other hidden fees?
An unsecured personal loan can be a good financing option if you’ve run into an unexpected expense or have a large purchase to fund.
It is important to compare the best personal loans before making a decision to see if you could be approved for a lower interest rate somewhere else.