Navigating the Personal Loan Application Process
Understanding the application process for personal loans is important to making informed decisions. Complete various steps, from determining your needs to comparing offers, to get the best option for your needs.
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By Christopher Boston
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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans. Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.
Edited by Lukas VeluntaLukas Velunta is a MoneyGeek content editor with over 12 years of experience in economics, finance, management and consumer science content. He also works as a researcher and academic editor, preparing articles from non-native English speakers for peer review in Q1 journals.
CB
By Christopher Boston
CB
Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans. Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.
Edited by Lukas VeluntaLukas Velunta is a MoneyGeek content editor with over 12 years of experience in economics, finance, management and consumer science content. He also works as a researcher and academic editor, preparing articles from non-native English speakers for peer review in Q1 journals.
Updated: February 25, 2024
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Personal loans are a flexible financial resource, allowing borrowers to access funds for a variety of needs, such as consolidating debt, financing large purchases or managing unexpected costs. These loans are often tailored to individual financial situations, making them a popular choice for those seeking a straightforward lending option.
Before taking out a personal loan, first understand the application process, which involves assessing your needs and finances, shopping around for lenders and comparing loan offers. MoneyGeek broke down the steps on how to apply for a personal loan to help you increase your chances of securing a loan that aligns with your personal financial goals.
When applying for a personal loan, the first and most important step is to figure out how much money you need to borrow. If you borrow more than you need, you'll end up paying interest on extra money that wasn't necessary. But if you borrow too little, you won't have enough to cover your needs.
Clearly understand why you need the loan. Is it for home repairs, medical bills or consolidating debt? Calculate the total cost of what you need. This might include materials for a home project, medical expenses or the total of your debts. Typically, lenders offer personal loans from $1,000 to $100,000. This gives you a broad spectrum to work with.
Another important aspect of borrowing is the origination fee. This is a one-time fee charged by lenders for processing the loan. It's typically a percentage of the total loan amount, deducted from your loan disbursement. For instance, if you need $10,000 for a project, and the lender's origination fee is 5%, you should actually apply for $10,500. This accounts for the $500 origination fee, ensuring you get the full $10,000 for your project.
CONSIDER USING A PERSONAL LOAN CALCULATORWhen determining how much you need to borrow, consider using a personal loan calculator. This online tool can help you visualize what your ideal loan might look like. By entering different loan amounts, repayment terms and interest rates, you can see how each change affects your monthly payments and total interest cost. It’s a practical way to make an informed decision that aligns with your particular needs and situation.
When applying for a personal loan, review your financial health, focusing on your monthly budget and credit score.
Your budget determines how comfortably you can manage loan repayments. To understand your budget, calculate your monthly income and deduct your regular expenses. The remainder is what you could potentially direct towards loan repayments. Be realistic to avoid financial stress in the future.
Your credit score, ranging typically from 300 to 850, can be checked for free through AnnualCreditReport.com. Make sure to request for a copy of your credit report from major credit bureaus like Equifax, Experian and TransUnion. A high credit score, typically above 670, suggests good financial responsibility and can lead to more favorable loan terms, such as lower rates and better repayment terms.
Conversely, a lower credit score can limit your loan options and result in higher interest rates. This is because lenders view lower scores as a greater risk. As such, knowing your credit score helps you understand where you stand in terms of loan eligibility and what terms you might expect.
IMPROVE YOUR CREDIT SCORE BEFORE APPLYINGWhile it's possible to secure a personal loan with bad credit, it can be more challenging and often comes with less favorable terms, such as higher interest rates. As such, boosting your credit score before applying is a wise strategy. Here are some tips to consider:
When applying for a personal loan, understanding the difference between secured vs. unsecured loans is a key step. Choosing the right option often depends on your financial situation and the purpose of the loan.
Secured personal loans are suitable when you have assets you can use as collateral, such as a car or property, and are seeking lower interest rates. Given that these loans are backed by an asset, they're typically easier to obtain and may offer more favorable terms, especially if your credit history isn't strong.
By contrast, unsecured personal loans are ideal if you don't have or prefer not to use assets as collateral. These loans rely on your creditworthiness and usually have higher interest rates compared with secured loans. They are a good choice for those with good credit scores who need funds without risking personal assets.
DIFFERENT TYPES OF PERSONAL LOANSAfter you’ve decided between secured and unsecured personal loans, consider the specific types of personal loans that align with your needs:
Each type of loan addresses different financial requirements, so assess your unique situation to determine the most suitable option.
Shopping around for lenders helps ensure you find the best terms and rates. You can usually get a personal loan from three types of financial institutions:
Banks are a go-to for many due to their reliability and comprehensive services. They offer the advantage of face-to-face customer service and are often preferred by those who value in-person interactions and have an established relationship with the bank. However, their loan approval process can be more stringent, and they might have higher interest rates and fees compared with other lenders.
Online lenders provide a convenient and fast application process. They are known for their quick loan approvals and disbursements, making them ideal for those who need funds promptly. Due to lower overhead costs, online lenders often offer competitive interest rates. However, they lack the personal interaction of traditional banks and might not offer the same breadth of services.
Credit unions are member-owned financial institutions that often have more favorable rates and flexible terms than banks. They typically offer a more personalized service experience. However, to access their services, one must be a member, which can be a limitation for some.
PREQUALIFY WITH MULTIPLE LENDERSPrequalifying gives you a preview of the loan terms you might receive, including interest rates and loan amounts, without impacting your credit score. This process involves providing some basic financial information to lenders, who then give you an initial loan offer based on a soft credit check. You can use this information to compare offers side-by-side, helping you find the most favorable terms.
Comparing loan offers from multiple lenders is an important step that allows you to identify the best loan for your financial goals. Each loan offer varies in terms and conditions, so a careful review ensures you choose one that's most beneficial for you.
When comparing loan offers, focus on the following factors:
This is the cost of borrowing money. A lower interest rate reduces the total amount you'll pay back over the life of the loan. Seek the lowest possible rate because even a small difference can lead to significant savings over time.
Verify that the offered loan amount aligns with your needs. If it's too low, it won't cover your requirements; if it's too high, you may end up paying interest on unnecessary funds. Choose a lender who offers the precise amount you need.
The loan term affects both your monthly payment and the total interest paid. Longer terms mean smaller monthly payments but higher interest over time, whereas shorter terms have higher monthly payments but lower total interest costs. Consider what term balances monthly affordability with overall cost efficiency.
Look beyond the interest rate at other fees, such as origination fees, prepayment penalties and late fees. These can add up and significantly increase the cost of your loan. Choose a loan with minimal additional fees.
If you need funds quickly, the speed at which a lender can provide the money is crucial. Some lenders offer faster processing and funding times than others, so consider this if time is a critical factor.
Some personal loans have restrictions on how you can use the funds. Make sure the loan you select permits the intended use of the money, whether it's for debt consolidation, home improvement or another purpose.
PERSONAL LOAN FEES TO WATCH OUT FORWhen applying for a personal loan, be aware of the various fees involved, because they can significantly increase the total cost of your loan. Even if you secure a loan with a favorable interest rate, these additional fees can add up, affecting the overall affordability of the loan. Some common personal loan fees to watch out for are:
Filling out and submitting a loan application is a crucial step in the process of acquiring a personal loan. This stage requires you to provide comprehensive personal and financial details, which lenders need to evaluate your loan request. You will typically need to share information such as your full name, address, Social Security number, details of your employment, your income and the specific loan amount you are seeking.
In submitting your application, you have two options: online or in-person. Applying online is fast and convenient, allowing you to complete the process from anywhere at any time. However, it may lack the personalized guidance that you might get from an in-person application at a bank or credit union. In-person applications can be beneficial if you prefer direct interaction and immediate answers to any questions.
Regardless of the method, you'll need to submit certain documents along with your application:
