A personal loan can provide a lifeline during an emergency or help you manage an outsize expense. You won’t have to sell your soul to apply for one, either. Instead, you must authorize a credit check, verify your identity, provide proof of income and meet other personal loan requirements.
Reputable personal loan lenders also allow you to pre-qualify, or check your eligibility and potential rates and terms before committing. Taking this step can give you a lay of the land and help you understand whether you need to improve your credit or find a cosigner to strengthen your application.
Here are all nine steps to get a personal loan:
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Featured Offer
SoFi
APRs
8.99% to 25.03%*
Loan amount
$5,000 to $100,000
1. Check and monitor your credit reports, scores
When you apply for a personal loan, lenders immediately review your credit reports and scores. As a result, you want to ensure your credit is in the best shape possible.
Good to know: According to federal law, you can get one free copy of each of your three credit reports per year. However, AnnualCreditReport.com is currently offering them for free on a weekly basis.
Review all the information on your credit reports, such as your credit accounts, payment histories, credit inquiries and any derogatory marks. Ensure that everything is accurate and up to date. If there are any mistakes, file disputes with the reporting credit bureau (Equifax, Experian and TransUnion) to get them fixed.
“Credit scores are not listed on credit reports, but the information used to generate the scores comes from the reports,” said Kyle Enright, the president of Achieve Lending.
Still, it’s wise to check your credit scores. While some companies charge you to see them, various banks, credit card companies and credit monitoring services offer them for free. Look for ways to quickly improve your credit scores or reports, such as paying down a credit card balance or “getting credit” for utility bill payments through the Experian Boost program.
2. Calculate your borrowing amount
Next, think about why you need to borrow money and how large of a loan you need. It can help to make a list that includes each item or service you want to pay for with the loan and its cost. If you’re not sure how much you need for a particular expense, do some research to find out. The more detailed your list and estimations, the better.
You don’t want to borrow more than you need because you’ll be charged interest on the full loan amount whether you end up spending it or not.
Example: Suppose you take out a $6,000 personal loan with a 12% annual percentage rate (APR) and a three-year term. It’ll cost you $1,174 in interest. On the other hand, a $4,000 loan with the same APR and term would only cost $783. So, if you only need $4,000, the lower loan amount will save you $391 in interest charges.
3. Research lenders and loan options
Online lending has grown in popularity over the past decade, drawing a wide range of lenders into the personal loan space. That’s a plus for you as a borrower because it gives you many options. However, it can take some research to find the lender that’s the best fit for your situation.
Lenders vary in terms of loan amounts, loan types, fees, interest rates, discounts, customer service, loan repayment terms and eligibility requirements. For example, LightStream caters to borrowers with great credit and offers loans up to $100,000 with terms up to 12 years, while Discover allows credit scores as low as 660 but only offers loans up to $40,000 with terms up to seven years.
Be especially wary of lender fees or prepayment penalties that may impact your costs. Pay special attention to origination fees, which are removed from your loan at funding and could be as much as 12% of your borrowing amount.
For a head start on shopping around, consider CNN Underscored Money’s best personal loan lenders:
Our picks at a glance
| Lender | Rating | Minimum credit score | APRs* | Repayment terms (years) |
|---|---|---|---|---|
SoFi | 5.0 | 680 | 8.99% to 25.81% | 2 to 7 |
PenFed Credit Union | 4.6 | Undisclosed | 7.99% to 17.99% | 1 to 5 |
U.S. Bank | 4.5 | 660 | 8.24% to 24.99% | 1 to 7 |
Upgrade | 4.5 | 580 | 8.49% to 35.99% | 2 to 7 |
Navy Federal Credit Union | 4.3 | Undisclosed | 8.99% to 18.00% | 1 to 5 |
Wells Fargo | 4.2 | Undisclosed | 7.49% to 23.24% | 1 to 7 |
Discover | 4.2 | 660 | 7.99% to 24.99% | 3 to 7 |
LightStream | 4.1 | Undisclosed | 7.49% to 25.49% | 2 to 12 |
Rocket Loans | 4.1 | 640 | 9.12% to 29.99% | 3 or 5 |
Prosper | 4.1 | 640 | 6.99% to 35.99% | 2 to 5 |
*Rates as of Jan. 24, 2024, may assume discounts
4. Pre-qualify with reputable lenders
Applying for a loan typically requires a hard credit check that drops your credit scores by up to five points, according to FICO. However, many personal loan lenders allow you to pre-qualify with a soft credit check that doesn’t harm your credit.
When you pre-qualify for a particular loan amount, lenders estimate your rate and term options (with lower rates typically awarded on shorter terms). Once you’ve collected a few quotes, compare them to find the best deal.
“While many online lenders are excellent businesses, it can be helpful to find one that offers both online capabilities and the option to talk with live consultants,” said Enright.
5. Budget your potential loan payment
As you collect quotes, you’ll likely receive various loan configurations, such as a three-year term with an APR that’s lower than a five-year rate.
Comparing loans can be confusing because one may seem like a better deal — but can end up being more expensive in the long run. For example, if you have two loans with the same loan amount and APR but one has a longer term, the longer one will have a lower monthly payment but a higher overall cost. A personal loan calculator (like Calculator.net’s) can help you evaluate different loan options.
As you evaluate different rates and terms, ensure that the potential monthly payments will comfortably fit into your budget. You don’t want to stretch yourself too thin and risk a default that can harm your credit.
6. Consider a co-borrower or cosigner
If you’re having trouble pre-qualifying, consider a co-applicant; some personal loan lenders allow co-borrowers or cosigners.
In the case of a co-borrower, you and the other person are both equal borrowers on the loan (sharing equal access to the funds) and are equally responsible for its payments. In the case of a cosigner, the other person agrees to pay the loan if you don’t but only plays the role of a guarantor and doesn’t share access to the funds.
Keep in mind that if you borrow with co-applicant support but can’t make the payments, the other person will be responsible. Further, any missed payments or defaults will impact their credit as well as yours.
7. Choose a loan offer and formally apply
After carefully reviewing quotes from different lenders and considering their different loan options, contact the lender with the best loan and complete the full application process.
In most cases, you’ll have created an account during the pre-qualification process that you can reuse. The formal application asks for more details about your income, living situation, employment, credit and assets. You’ll likely provide documentation, such as pay stubs, a government-issued ID, tax returns or utility bills. The lender also performs a hard credit inquiry on one or more of your consumer credit reports.
After completing the full application process, most lenders provide you with a decision right away, often the same day you apply.
8. Read every clause of the loan contract
Upon approval, the lender will send you a loan contract (or upon denial, see below). In most cases, it’s sent over using secure electronic signing software. Take the time to read the loan contract thoroughly and make sure that you fully understand all the terms and conditions.
Additionally, confirm that the following loan details haven’t changed since receiving your loan offer:
- Loan amount
- Loan repayment term
- Discounts
- Funding time
- What happens if you miss a payment
- Interest rate
- Fees (including for origination and prepayment)
- Total cost of the loan
9. Sign your loan documents and get the cash
If your loan contract matches your expectations, provide your e-signature and send the contract back to the lender.
All that’s left is for the lender to send the loan funds to your designated bank account. In many cases, you can get a direct deposit of the loan funds as soon as the same or next day. When the funds hit your account, you can use them as you please (though many lenders prohibit using them for your business or higher education costs). However, it’s best to practice discipline — pull out the list you created in step 2 (above) and stick to your plan.
Some lenders can disburse funds the same day they approve your application, while others may take up to a week. Receiving the loan funds also means the start of your repayment — be sure to check when your first loan payment is due so you don’t miss it. You may also want to consider setting up automatic payments. They can help to ensure you don’t miss a payment and may come with an interest rate discount.
Refresher course: How do personal loans work?
Personal loans are typically unsecured, meaning they don’t require you to have collateral. Though less common, there are secured personal loans for borrowers who may not have the best credit. For a secured loan, you’d pony up collateral (such as savings, property or other assets) that could be vulnerable to seizure if you default.
Your credit profile determines the interest rate on your loan, the fees you pay and the amount you qualify to borrow. You can take out anywhere from a few hundred to many thousands of dollars and repay the loan over months or years, depending on what the lender offers. LightStream is an example of a lender that allows customers to borrow up to $100,000.
If you need to cover a major expense, a personal loan may be a better option than a credit card. In fact, a personal loan can be used to pay off or consolidate credit card debt, saving you money. That’s because personal loans carry higher interest rates than average credit card APRs, according to the Federal Reserve.
You can also get your cash quickly with a personal loan. Some lenders fund personal loans as soon as the next business day after approval.
Requirements for a personal loan
Personal loan lenders review various factors to determine your eligibility. If necessary, you can boost your loan application — or secure better terms — by applying with a cosigner or co-borrower who has strong marks in the following categories and is OK with being legally responsible for repayment:
- Credit scores: Many lenders require at least fair credit to qualify for a personal loan. But some lenders are more open to bad credit borrowers than others. You can check your credit scores via your credit card issuer, financial institution or a credit monitoring service. The higher your scores, the lower your interest rate will be.
- Payment history: Lenders will also review your credit report for any signs you might not repay your debt. Past missed or late payments on other loans and credit cards could harm your application.
- Proof of income: If you don’t have a steady source of income, you may not be eligible. Some lenders may require a minimum annual income to qualify. Discover, for example, says borrowers must have an individual or household income of $25,000 to be considered.
- Debt-to-income ratio: Your debt-to-income ratio (DTI) is the share of your monthly income that you spend making minimum payments on your debts. If it looks like you’re stretched too thin, you could be denied a personal loan.
- Other factors: Some lenders only lend in select states or require you to have US citizenship. Lenders might also limit how you can use the funds: You usually can’t use a personal loan to pay for higher education, start a business or for illegal activities.
What can you do if you’re denied a personal loan?
Start by finding out why you were denied.
“If an applicant is denied, the lender must provide an adverse action notice,” said Enright. “This will provide the reason for the denial. From there, you can take the appropriate steps before you apply again.”
Here’s what you can do to improve your situation before applying again, based on the reason for denial:
| Common reason for denial | Possible solution |
|---|---|
Low credit scores | Improve your scores by correcting errors on your credit report, making on-time payments, and paying down debt. Alternatively, consider a co-applicant for an unsecured personal loan — or a secured loan that requires collateral instead of good credit. |
High debt balances | If you’re overwhelmed by debt, consider enrolling in a debt management plan offered by an approved nonprofit credit counseling agency. Or use a debt repayment strategy like the debt avalanche method, which involves focusing on your highest-interest debts first. |
Inconsistent employment | If you haven’t had steady employment or consistent income — perhaps because you’re self-employed, transitioned careers or took time off — consider applying with a different lender that’s more open to your situation. |
Insufficient income | Double-check that you’ve included all sources of income. If you still don’t qualify, consider another lender that is more lenient with its income requirements. “You can also apply for a smaller amount the next time you apply,” said Enright. |
Incomplete application | If you failed to upload one of the required documents or fill out some of the paperwork, the lender will likely request the missing information from you. Once you’ve supplied what the lender needs, you might be approved. |
If you have too much debt, not enough income or bad credit, you can also apply again with a co-borrower or cosigner. Just make sure you can afford to repay the loan yourself, or the other borrower or cosigner will also face the fallout of a repayment gone awry.
Alternatives to personal loans
Whether you could be approved for or denied a personal loan, you have other borrowing options, including:
| Alternative | Best for | Details |
|---|---|---|
Home equity loan (or line of credit) | Borrowers with plenty of home equity who need a large loan or have ongoing home improvement expenses | These products allow you to borrow against the equity in your home. They tend to come with lower rates, but they also require closing costs, and you could risk losing your home if you default during repayment. |
0% introductory APR credit card | Borrowers who need to fund a large purchase or consolidate debt and can afford repayment during the introductory period | Some credit card issuers offer 0% APR for new cardholders for up to 21 months. Keep in mind that they come with a balance transfer fee. Also, make sure you can repay your debt before the promotional period ends so you don’t get stuck with a high interest rate. |
401(k) loan | Borrowers with poor credit and plenty of available retirement funds who plan to stay at their jobs | If your plan administrator allows, you can take a loan from your 401(k) without a credit check. You must repay it with interest to avoid penalties. More fine print: If you leave your job, the loan could become due in full, all at once. |
Friends and family loan or crowdfunding | Borrowers with poor credit who need flexible repayment terms or can’t afford to repay | Getting a loan from friends or family may be the easiest way to meet your financial needs, if available. You can also use crowdfunding to collect small amounts from your social network. Crowdfunding is an especially good strategy for an immediate expense you can’t afford to repay, like a medical or veterinary bill. Just be aware that if you receive more than $600, the amount could be taxable, according to the IRS. |
Additional reporting by Jessica Walrack
Frequently asked questions (FAQs)
A personal loan is a sum of money provided by a bank, credit union or online lender that you repay in fixed, monthly payments over time. For the privilege of borrowing, you’ll also pay interest (and perhaps fees) to the lender with each payment. You can use a personal loan for almost any legal expense, and you can often choose your repayment term. Many lenders offer terms spanning two to seven years or longer.
While the application process for a personal loan is straightforward, lenders want to see that you have good credit, manageable debt and sufficient income. Those requirements can create challenges for some borrowers.
Most lenders make it relatively easy to get personal loans. You can apply online within a few minutes, get an instant decision and have the funds in your account within days. That said, some lenders have stricter eligibility requirements than others. If you’re seeking a bad credit personal loan, for example, check out OneMain Financial, Upstart, Avant and Prosper.
The monthly cost of a $5,000 personal loan depends on the loan’s term and interest rate. For example, a $5,000 loan with a 10% interest rate and a three-year loan term would cost approximately $161 per month. However, a $5,000 loan with a 20% interest rate and a two-year term would cost approximately $254 per month. You can use a free online personal loan calculator to determine your potential monthly and overall costs.
Personal loans don’t typically require collateral, but some lenders may allow you to secure the loan with the title to your vehicle, your home equity or home fixtures, your savings or investments or other valuables. This can make it easier to qualify for a personal loan, but you could lose the asset if you fail to repay.
Once you’re approved for a loan, it typically takes one to five days to receive the funds from a bank or credit union, but some are faster than others. Online lenders are typically the fastest, and some can fund loans within the same day.
