Are you short on funds or need some money to take care of an emergency like medical bills? Thankfully, banks and other financial institutions allow you to borrow money to cover such expenses. A personal loan is an amount of money you obtain from a lender with the intention of repaying it.
You can obtain a loan for almost any purpose, including paying off debts, purchasing a new car or appliance, vacationing, or even settling student loans. However, you’ll be required to repay the loan with interest over time in monthly installments.
A personal loan application process is similar to an auto loan, credit card, and other financial product application. To get approved for a loan, note that you’ll need to provide documents such as your credit history, proof of residence, bank statements, social security number, and others.
If the lender is satisfied with your application, they’ll approve your loan request and present you with their terms. Applying for a loan with as much knowledge as possible increases your chances of getting the best loan offers and APR. This article will give you a complete breakdown of how to apply for a personal loan.
What Are the Different Types of Personal Loans?
You can obtain a personal loan from your bank, credit union, or online lender. There are different types of personal loans you can apply for, and the interest rate is either variable or fixed. Before we begin with the loan application process, let’s have a look at the different types of personal loans available:
- Secured Personal Loans
Any loan you apply for that requires collateral is known as a secured loan. You must have an asset that can serve as collateral if you want to get the loan. For example, the lender may ask you to put up your house or car as collateral before getting the loan.
Secured loans are an excellent option for people with low credit scores and an asset to put up as collateral. However, the downside of applying for a secured loan is that the lender is free to seize and sell your asset if you fail to repay the loan on time.
- Unsecured Personal Loans
Unsecured loans don’t require collateral, meaning you can obtain funds without giving up your assets. This loan option is usually approved faster than secured loans and is best for people with an excellent credit score. However, the downside of applying for an unsecured loan is that they generally attract higher interest rates.
- Debt Consolidation Loans
Debt consolidation loans are an excellent choice for people who want to pay off an existing debt without worrying about high-interest rates. Plus, people who choose this loan option enjoy the benefit of streamlining their loan repayment process.
The idea is to obtain a loan with a rate lower than the interest on the debts you intend to consolidate. The funds you’ll receive from the lender will be used to clear out your outstanding debts. Additionally, you’ll have to make payments on a new loan package for a set period.
Debt consolidation loans can help you clear out your debt faster and save hundreds of dollars in interest. However, note that you may be in serious trouble if you use this loan option to settle credit card balances. Also, this loan option can be risky if you continue to swipe your cards after maxing out the balances. You could end up adding to your debt if you’re not careful.
- Co-signed and Joint Loans
Co-signed loans are loans you obtain with the help of a co-signer. This type of loan is best for people who don’t qualify for a personal loan on their own. Your co-signer could be your spouse, family member, trusted friend, or guardian.
However, note that your co-signer must have a good credit report before they can help you secure a loan. The co-signer must also be prepared to take on the responsibility of paying off your outstanding balance if you default on loan payments.
Usually, co-signers can’t have access to your loan proceeds. However, they can gain access to your loan if you agree to apply for a joint loan. Most lenders offer joint loans, which allows both parties (you and the co-signer) to access the funds. Like a co-signed loan, your co-signer must have a good credit score, and both parties are responsible for loan payments.
- Fixed-Rate Loans
Fixed-rate loans have an interest rate that doesn’t change throughout the loan’s repayment period. You’ll have to make the same monthly payment until you settle the loan. Most personal loan offers fit into this category. Fixed-rate loans make it easier to include loan payments into your budget since the payment amount doesn’t change over time.
- Variable-Rate Loans
Variable-rate loans are the opposite of fixed-rate loans, as this loan option comes with a fluctuating interest rate. Variable rates are suitable for people who want to apply for short-term loans. Your monthly payment depends on the benchmark rate set by the bank.
So, your interest rates may increase or decrease over time if the benchmark rate changes. The benefit of choosing variable-rate loans is that they have much lower interest rates than fixed-rate loans.
- Buy Now, Pay Later Loans
A “buy now, pay later” loan allows customers to make purchases without having to provide the entire amount up front. With this loan option, customers can divide the balance and make equal weekly or biweekly payments.
This loan option is usually made available through mobile apps like Affirm, Zip, and Klarna. The benefit of “buy now, pay later” loans is that you can obtain them even with a low credit score. However, note that you still have to prove your ability to pay back the lender. Most lenders will review your financial history and run a soft credit check, which doesn’t affect your credit rating.
- Personal Line of Credit
A personal line of credit gives you access to a reserve fund from which you can borrow money whenever you need it. The benefit of choosing this loan option is that interest is only charged on the amount you withdraw, not the entire loan amount. This loan option is suitable for people who prefer a safety net where they can access funds when needed.
Where to Obtain a Personal Loan
You can obtain a personal loan from two main sources: financial institutions (those with a charter or banking license) and non-banking financial institutions (those without a license). The main difference between the two institutions involves regulations.
- Banks and Credit Unions
One of the most popular places to get personal loans is from banks and credit unions. These institutions have a charter or banking license. Plus, they are governed by the National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), Federal Reserve, and Federal Deposit Insurance Corporation (FDIC).
One advantage of securing a loan from a bank or credit union is that they don’t charge loan origination fees. In credit unions and local banks, the loan application process entails meeting the loan officer and discussing the loan terms in person.
If you are eligible for a loan from the bank, the officer will guide you through the application process. Banks tend to have higher requirements for loan eligibility when compared to other institutions. However, they may cut you some slack if you are already a customer. On the other hand, credit unions have a less rigid qualification process and interest rates than banks. However, credit unions require you to open an account with them before you can do business there.
- Non-Banking Financial Institutions (NBFIs)
Non-banking financial institutions (NBFIs) are lenders that operate without a banking license. The CFPB governs NBFIs, and they don’t accept deposits, making their terms of services different from that of banks. NBFIs include insurance companies, online lenders, payday lenders, peer-to-peer (P2P) lenders, and other non-bank entities.
One of the benefits of using NBFIs is that they have a less rigid loan qualification process than banks and credit unions. Further, they approve loans most banks won’t. However, the downside of using NBFIs is that most lenders charge a higher interest rate.
P2P lenders may offer a fair interest rate if you have a good credit score. However, they may charge you insanely high rates if they consider you a credit risk. Also, payday loans are popular for charging hidden fees, making them a bad loan option.
How to Qualify for a Personal Loan
Although banks and other lenders offer their customers personal loans, not everyone is eligible for one. Here’s how to qualify and apply for a personal loan in eight easy steps:
- Run the Numbers
Taking out a loan you can’t afford to repay is the last thing you want. Defaulting on a loan will seriously affect your credit score and your relationship with the lender. Although most lenders perform their due diligence, you should run your numbers.
The first step is to determine how much money you’ll need to get what you want. Note that some lenders charge an origination fee that is deducted from the loan proceeds. Thus, ensure the loan you intend to obtain will be enough to cover the fee and get what you need. Further, use a personal loan calculator to estimate your monthly payments. Most online lenders provide you with a personal loan calculator on their website. So, ensure you use this tool to calculate your monthly payment.
Determining your monthly payment can be difficult if you don’t know the loan terms and rates of the lender. However, you can walk around this by playing with numbers to get an idea of your monthly payment. Also, running your numbers will help you decide whether or not you can keep up with the loan payment.
- Check Your Credit Score
Most lenders will review your credit history before approving your loan request. Hence, ensure you check your credit report before applying for a loan. Your credit score is fair if your numbers fall between 580 and 669. Any score above 670 is considered excellent credit, and any score below 580 is considered a bad credit score. You can obtain a free credit score copy from three major credit reporting agencies; Equifax, Experian, and TransUnion. Plus, you can check your credit score for free from all three credit bureaus once a year.
If you have a bad credit report, you are basically telling the lender that you will likely default on the loan payment. However, you can take certain steps to improve your credit score. Note that improving your credit score increases your chances of getting a loan with good interest rates. One of the best ways to quickly improve your credit score is to settle any outstanding debts. Your credit card balances should be less than 30% of your overall credit limit. Likewise, you can improve your credit score by fixing any errors in your credit report.
Request a copy of your credit report from any of the three main credit bureaus and check if there are any errors. If you find any errors, file a dispute with the credit reporting agency and fix them right away. Ensure you submit a separate complaint to the institution or service provider reporting your credit information inaccurately.
You can improve your credit score by making on-time payments. Keep track of your debt obligations to avoid missing payments. Moreover, some lenders might grant you a loan despite having a bad credit score. However, such loans usually come with high-interest rates and fees to make the offer worthwhile.
- Consider Your Options
Banks, credit unions, and other non-banking financial institutions are all places you can get personal loans. Since most lenders will review your financial history, the loan offer will depend on your credit score. If a lender doesn’t find your credit score high enough, they may ask you to provide a co-signer. Your friend and family member with a good credit history can stand as your co-signer. However, you can apply for a secured personal loan if you can’t provide a co-signer.
When applying for a secured loan, you’ll need to provide loan documents and, most importantly, collateral. You can use your house, car, and cash in your savings account as collateral. The downside of obtaining a secured loan is that the lender is free to seize your asset if you default on loan payment.
If you feel you can’t satisfy the loan qualification requirements of your bank, then consider applying to a credit union. Credit unions have a less rigid loan qualification process and better interest rates than banks. You can also obtain personal loans from lenders that provide bad-credit loans if you have a bad credit score. In summary, search for other loan options if you think you won’t receive loan approval from a particular lender.
Co-signed loans, secured loans, and bad credit loans are all options you can explore when trying to secure a loan. Also, you can delay your purchase and take some time to improve your credit score to get better offers.
- Select a Loan Type
The next step is to choose a loan type. Once you have considered all your options, select the type of loan that best suits your needs. Head to the Bankrate marketplace and search for the different types of personal loans available. There are several types of personal loans you can apply for, and they include:
- Debt Consolidation Loans
A debt consolidation loan is the type of loan you take to cover or settle an existing debt. With this option, you can easily reduce the number of monthly payments you have to worry about on an existing debt. Plus, debt consolidations usually have lower interest rates.
- Home Improvement Loans
Home improvement loans are an excellent option for people who want to finance a large renovation. You can choose this loan option if you prefer to finance a renovation upfront without taking out a secured home equity loan.
- Credit Card Refinancing Loans
Companies like Payoff and FreedomPlus provide loans to people looking to settle credit card debt. Personal loans usually have a lower interest than a credit card, making them an excellent choice for settling credit card balances faster.
- Emergency and Medical Loans
Emergency loans are loans you obtain to cover unexpected expenses like car trouble, broken pipes, and medical bills. Since emergencies can happen anytime, getting a personal loan could be a great way to cover these unexpected expenses.
- Wedding and Vacation Loans
Another common reason people secure personal loans is to cover wedding and vacation expenses. Since vacations and weddings can be pricey, most people take out personal loans to pay for them. Plus, personal loans eliminate the need to worry about paying for your special occasion all at once since you can space out the loan payments over several years.
These are examples of personal loans you can obtain to meet your needs. However, note that some lenders are strict about how you use your funds while others are flexible with their terms. For example, lender A may allow you to use your funds for business purposes. On the other hand, lender B may forbid you from using your borrowed funds for any kind of business activity. It’s best to find a lender willing to lend you money for the specific purpose you require.
- Obtain Loan Prequalification From Multiple Lenders
Different lenders have different personal loan rates. You can compare loan terms and rates without causing a hard inquiry to show up on your credit report, which affects your credit score. Thus, ensure you compare the rates of multiple lenders before making a decision.
Many online lenders provide a prequalification tool to compare different loan offers. By requesting prequalification, you can also determine your chances of being approved for a personal loan with competitive rates. Also, requesting prequalification allows you to check for loans you won’t qualify for without risking hard inquiries. To compare your offers, visit the lender’s website and look for an invitation to submit your information or check rates. For example, you may find a button that says “Compare Your Rates” or “Check Your Rates” on the lender’s website.
Next, fill out the prequalification form and submit it. You may be asked to provide information about your ideal loan term, loan purpose, annual income, and loan amount. Therefore, ensure you have all this information ready before you begin. Once you submit the form, the lender will run a soft credit check to determine your creditworthiness. Lastly, ensure you prequalify with several lenders to get the best loan options.
- Compare Your Offers
After submitting the prequalification form, your eligibility for a loan will depend on your creditworthiness. You’ll likely receive multiple loan offers if the lender finds you creditworthy. Hence, ensure you compare each offer you receive from prequalified lenders and then choose the option that best suits your needs. Here are important factors to consider when comparing loan offers from multiple lenders.
- Annual Percentage Rate (APR)
APR is the interest rate you’ll pay for a whole year. In other words, the APR is the financial fee that is calculated at an annual rate. Your APR, which includes interest and fees, allows you to determine how much it will cost to secure the loan you qualify for. Note that the loan cost may increase over time with a higher APR.
- Loan Term
Your loan term is the amount of time you have to repay the loan. Personal loans usually have a two to seven years term. Also, monthly payments are lower for loans with longer payment periods. However, you may end up paying more interest in the long run.
- Loan Amount
When comparing loan offers, check to see if the loan amount will be enough to meet your needs. Ensure the loan amount will be enough even after the lender deducts their fees (if any). Additionally, ensure that the loan amount is something you can afford to pay back.
- Monthly Payment
Your monthly payment is the amount owed each billing cycle, which normally occurs every 30 days. Make sure the monthly payment for your chosen loan fits into your budget.
- Origination Fee
Check if the lender charges an origination fee. An origination fee is an up-front fee a lender charges you for processing a new loan application. This fee serves as compensation for processing the loan. Origination fees usually range from 1% to 8% of the loan amount. You can settle this fee as a closing cost or include it in your loan balance. A loan offer without origination fees is ideal in most cases.
- Apply for the Loan
If you find a lender that meets all your requirements, the next step is to apply for the loan. If you are using an online lender, you may be able to complete the whole process online. However, you’ll need to visit your loan officer if you use a bank or credit union.
Gather all the documents you need to secure the loan and submit them to the loan officer or lender. The documents you must submit will depend on the lender’s loan requirements. However, you need to provide your name, job status, income status, bank account, social security number, and a valid means of identification.
Also, be prepared to provide any additional documents the lender may request. For example, you may need to provide proof of residence and a copy of your latest pay stub. Once you submit your application, the lender will take some time to double-check your credit report.
However, note that this credit review will cause a hard inquiry to appear on your credit report. Plus, Your credit score could drop up to five points for a year due to a hard inquiry. Reviewing your application can take a few hours or days, depending on the lender.
- Accept the Loan Offer
Once you’ve finally come to a loan agreement with the lender, all you have to do is accept the loan offer. You’ll have time to review the loan terms and conditions before signing the documents. Hence, ensure to read the loan agreement thoroughly before accepting the offer.
Accept the offer if you find the interest rate, monthly fees, and other terms satisfactory. The lender will deposit the funds directly into your bank account once you sign or accept the loan deal. Direct deposits may take 24 hours and even up to a week. On the other hand, online lenders usually disburse funds more quickly, which can take one to two business days.
After receiving your funds, the next step is ensuring you fulfill your loan obligations on time. As a tip, you can set up automatic payments from your checking account. Plus, some lenders will lower your interest rate if you set your account to make autopayments. Further, consider adding some extra cash to your monthly loan payment. You can reduce your interest costs and settle your loan sooner by increasing your monthly payments—no matter how little.
Conclusion: How To Apply For A Loan?
People take personal loans to cover their wedding, medical, vacation, home improvement, and other expenses. You can get a personal loan from banking and non-banking financial institutions such as credit unions, banks, and online lenders.
Lenders take certain steps, such as pulling credit reports and contacting your employer to ensure you are creditworthy. Thus, ensure you perform your due diligence to get the best offers when applying for a loan. It involves running your numbers, improving your credit score, preparing your loan documents, and comparing your options. If you feel your credit isn’t high enough, you can go for lenders that offer co-signed or bad credit loans.