How To Apply for a Personal Loan

A personal loan can be a powerful and flexible financial tool. It can be used for nearly any purpose, including debt consolidation, large purchases, and financial emergencies. And the fixed interest rate and repayment term provide predictable monthly payments.

Personal loans have a straightforward application process, but you need to prepare and understand the process before you get started.

How To Apply for a Personal Loan

Applying for a personal loan is a relatively simple process that, thanks to online applications, can often be done in just a few minutes. There are a few things you’ll need to gather ahead of time, a series of questions to answer during the application, and a few final steps necessary to close on your loan and receive the funds.

Here are the main steps for applying for a personal loan:

1. Review your finances.
2. Shop for a personal loan.
3. Get prequalified.
4. Gather documents.
5. Apply for the loan.
6. Close on your loan.

Preparing To Apply for a Personal Loan

Before you apply for a loan, there are a few steps you’ll want to take to prepare. First, you should do a thorough review of your finances, which includes checking your credit score, verifying all the information on your credit report, and evaluating your current income and debt.

During the preparation stage, shop around for the best lender. There are many personal loan lenders to choose from, including traditional banks, online banks, and credit unions. Consider each lender’s interest rates, borrowing requirements, fees, and other factors to help narrow down your search.

Get Prequalified

Many personal loan lenders allow you to prequalify for a personal loan, which often doesn’t impact your credit score. Instead, prequalification usually involves an informal review of your credit report known as a soft inquiry. 

Prequalification isn’t the same as loan approval. Your application could still be denied based on the financial information you provide the lender when you officially apply. But prequalifying for a loan can give you a good sense of whether you’ll qualify and at what interest rate.

Gather Documents

Once you’ve been prequalified, gather the documentation you’ll need to apply. Being approved for a personal loan requires more information than prequalification. 

Here are some documents you may need to complete your personal loan application:

• Social Security number
• Driver’s license or another government-issued ID
• Proof of employment
• Proof of income
• Statements of assets
• Statement of other debts

Apply for the Loan

The personal loan application process is often straightforward. On the application, expect to answer questions about:

• Your personal and contact information
• Your employment and income
• Your other liabilities
• What you plan to use the loan for

During the application, you’ll also have to consent to a hard credit check, which will appear on your credit report. Depending on the information you provide and the results of your credit check, your application may be approved immediately. In other cases, the lender may need more time to review your situation.

Close on Your Loan

Once your application has been approved, you must officially close on your loan before you can receive the funds. In most cases, you’ll just have to digitally sign the loan agreement and the lender will disburse the funds.

Keep in mind that by signing the loan agreement, you’re taking legal responsibility for repaying the loan based on the terms of that document. Be sure to thoroughly read the document and ensure you can meet the monthly payment requirements.

Alternatives to a Personal Loan

A personal loan can be an effective financial tool for many different situations. But before you apply for one, consider all your financing options. Some alternatives to personal loans can include:

• Credit cards: While credit cards generally aren’t a good solution for large purchases with long-term repayment, there are some exceptions. Many credit cards offer introductory offers with 0% APR for a certain period. If you feel confident you’ll be able to repay your loan during the introductory APR period, you could avoid interest altogether.

• Home equity loans: Similar to a personal loan, a home equity loan is an installment loan, usually with a fixed interest rate. The major difference is that a home equity loan is secured by the equity you have in your home. As a result, these loans generally have lower interest rates, but they also carry the risk of foreclosure if you can’t repay the loan.
• Home equity lines of credit (HELOCs): A HELOC is similar to a home equity loan in that it’s secured by your home equity. But instead of being an installment loan with a fixed interest rate, a HELOC acts more like a credit card with a variable interest rate and revolving credit line. You can borrow from it again and again, but only up to your credit limit.
• Personal lines of credit: If you don’t own a home or would prefer not to use it as collateral, a personal line of credit can be an alternative to a HELOC. Like a personal loan, a personal line of credit is unsecured. But like a HELOC or credit card, it has a variable interest rate and can be drawn upon multiple times.
• Savings: If you’re facing a financial emergency and don’t have savings, then borrowing may be your only option. But if you’re considering a large purchase and you don’t have the funds in cash, consider postponing your purchase and saving for it. You’ll avoid paying interest and adding another monthly payment to your budget.

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