How To Apply For A Personal Loan: A Complete Guide
Hanna Kielar6-minute read
PUBLISHED: October 21, 2022 | UPDATED: January 27, 2023
Personal loans are a common type of financing that borrowers can use for a wide range of purposes. Some people may use a personal loan for debt consolidation or to make a large purchase. Others might want to pay for a home improvement project or cover wedding costs. No matter how you plan to use the funds, a personal loan can free up your budget or prevent you from emptying your savings account.
Let’s discuss the steps for how to apply for a personal loan and look at some important considerations that will help ensure you find the best possible option for your situation.
Step 1: Calculate Your Loan Amount
The first step in the personal loan application process is deciding what you’ll do with the money. Once you’ve figured this out, you can determine how much you’ll need. Keep in mind: You might have to do some research to ensure you’re borrowing an adequate dollar amount.
For instance, if you want to use a personal loan to buy a motorcycle, you need to know how much the specific make and model you’re looking at will cost. You could visit a local dealership to ask a salesperson for a quote so you know exactly how much money you’ll need to cover the entire purchase, including the sales tax and any additional fees.
After you’ve determined your desired loan amount, you can calculate your monthly payments based on different lengths of time. This step will help you choose a loan term that best fits your needs.
To continue our example, let’s say you want a loan of $5,000 to purchase the motorcycle, and you know that your monthly payments should be about $170. Using a personal loan calculator, you can determine that you’ll need a loan term of at least 30 months to keep the monthly installments low enough to fit your budget.
Step 2: Review Your Credit Report
Once you have an idea of the loan amount and term you want, it’s time to check your credit score. Lenders use your three-digit FICOⓇ Score to determine your interest rate. The higher your credit score, the lower your interest rate and the less interest you’ll pay over the life of the loan.
Checking your credit report before you apply for a personal loan will allow you to address any issues that may keep you from qualifying for the loan. When you receive a copy of your credit report, carefully check each entry for accuracy. If you find any typos or mistakes, reach out to the credit bureau you received the information from and request a correction.
Step 3: Evaluate Your Loan Options
Your next step in the process is to figure out what type of personal loan you want to use. Your options include:
Your best options will depend on your financial situation. If you have poor credit or want a low interest rate, you might want to opt for a secured personal loan and use collateral. But if you don’t have an item of value to use for collateral, an unsecured loan might be the better option. Or, if you want a fixed monthly payment amount, you should choose a fixed-rate personal loan over an adjustable-rate one.
Step 4: Compare Interest Rates And Lenders
Besides comparing different types of personal loans, you should evaluate the interest rate and annual percentage rate (APR) offered by multiple lenders. Some categories of personal loans and types of lenders will have lower interest rates and origination fees than others. For example, online lending platforms and credit unions are often more affordable because they don’t have the same operational costs or financial goals as a traditional bank.
You should also compare repayment terms and disclosures from financial institutions. Some lenders might only offer terms of 60 months while others allow for up to 84 months.
Step 5: Get Prequalified
With your analysis of current interest rates complete, you may be tempted to fill out an application with the lender advertising the lowest APR. Instead, take the time to get prequalified first. This precaution can help you confirm that you’re eligible for a personal loan while making sure you choose the best option for your situation. Please note that not all personal loan companies offer prequalification.
For prequalification, you must submit some basic information to your lender of choice. This might include your annual income, Social Security number, desired loan amount and how you’ll use the loan. From there, the lender will provide an estimate of your potential interest rate and monthly payment. If you think these estimates will work with your budget, you can submit an application.
However, if you’re unhappy with the installment amount or interest rate, you can get prequalified with another lender. Since you haven’t signed any paperwork, you’re not obligated to take out a loan and you can keep comparing loan estimates until you find the perfect one.
Getting a personal loan has never been easier.
Step 6: Collect Necessary Documentation
Once you’ve decided to apply for a loan, your lender will require additional documentation for the application. You’ll have to provide your contact information along with documents such as:
- A form of identification: You can use a driver’s license, state-issued ID or passport to confirm your identity.
- Proof of income: You can provide pay stubs, bank account statements and tax returns. If you own a business, you might have to include profit and loss statements, income tax returns and court-ordered agreements.
- Proof of address: Your lender will want a copy of your voter registration card, a recent utility bill, a lease agreement or an insurance policy to verify where you live.
Step 7: Submit The Loan Application
Finally, you made it to the last step. Now it’s time to fill out a loan application and submit it to your lender. However, you’re not done yet. Over the next couple of days, your application will go through the underwriting process.
Underwriters will review your personal finances and check your credit history and possibly your debt-to-income ratio. As they do this, they might have questions or need additional information. That means you’ll need to be available to send documents or answer questions. If you receive any requests from your lender, respond to them promptly to avoid delays.
Personal Loan Application Process FAQs
Use the answers to these frequently asked questions to learn more about applying for a personal loan.
How do I apply for a personal loan online?
These days, most lenders offer services online, allowing borrowers to get a personal loan without visiting a brick-and-mortar location. If you prefer the online method, you can start by creating an account on the lender’s website. Then, you can fill out the online application and attach scans of your documents.
You can typically use the online portal to track your application’s progress as you wait for approval. Your lender might even offer an instant messaging feature you can use to chat with them without sending an email. After you’re approved, your lender will in all likelihood notify you via phone, email or text message.
How long does the approval process take?
Compared to other types of financing, the approval process for a personal loan is short – usually 1 to 3 business days. And receiving your payment will probably take between 1 and 5 additional business days.
With Rocket LoansSM, you could qualify for same-day financing, meaning you get the funds the same day you’re approved.*
What can I use as collateral on a secured personal loan?
A secured personal loan has several advantages, such as a lower interest rate and a longer term. If you decide to use this type of personal loan, you could use any of the following as collateral:
- Motor vehicles
- Pieces of real estate
- Certificates of deposit (CDs)
- Savings accounts
- Mutual funds
In most cases, the item must have a high enough monetary value to ensure your lender feels protected.
Will applying for a personal loan affect my credit score?
Applying for any type of loan can negatively impact your credit score. That’s because most lenders will do a hard inquiry on your credit to determine your creditworthiness. In other words, they’ll check your financial information to make sure you can pay back the loan.
Thankfully, you’ll likely only see your credit score drop by a few points during the application process, and it should recover within a short period of time.
Researching and assessing multiple options before applying for a personal loan can feel overwhelming, but it doesn’t have to be. By using the steps outlined above, you can simplify your efforts while securing the most affordable option. When you’re ready to apply, you can get started online with Rocket Loans.
*Same-day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
Personal Loans Any Time, Any Place.
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