How to apply for a personal loan: A complete guide

Personal loans are a popular type of financing thanks to their versatility — the funds can be used for almost any purpose, and borrowers can take advantage of fixed monthly repayment terms. Financing a major purchase with a personal loan can free up your budget or prevent you from emptying your savings account.

Whether you’re looking to consolidate debt or fund a home improvement project, understanding the steps involved can make the process easier. This guide will walk you through every step of the process so you can compare lenders, find the best interest rates, and secure favorable repayment terms. Let’s look at how to apply for a personal loan and important factors to consider along the way.

Step 1: Calculate the loan amount you need

The first step in applying for a personal loan is determining how much money you need to borrow. You’ll receive the funds as a one-time lump sum payment, so it’s important to accurately calculate the amount you need.

Start by assessing your finances and adding up the total costs of the expenses you need to cover. For example, if the loan will be used to consolidate high-interest credit card debt, review each card’s balance to calculate the payoff amount. If the loan is for home repairs, you can ask the contractor for an estimate.

After you’ve determined your desired loan amount, you can calculate your monthly payments using the personal loan calculator from Rocket Loans^SM. This step helps you choose the interest rates and loan terms that best fit your needs.

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.

Credit scores range between 300 and 850 — here’s a breakdown of the different levels and what each means:

• Exceptional: 800-850
• Very good: 740-799
• Good: 670-739
• Fair: 580-669
• Poor: 300-579

You can request a free copy of your report once a year from the three major credit bureaus at AnnualCreditReport.com. Checking this report allows you to find errors that could be hurting your credit score, but the report doesn’t include a free credit score.

Fortunately, many services available let you check your credit score for free, including banks, credit card companies, and certain personal finance apps. However, the free score you see will not be the exact score lenders see since there are a variety of FICO^® software options.

Step 3: Evaluate your loan options

After you assess your credit score and its impact on your interest rate, your next step in the process is to determine what type of personal loan you want to use. Your options include:

• Secured loan: If you take out a secured personal loan, you’ll pledge some type of collateral, like cash or real estate. If you default, your lender can seize the collateral to recoup their losses Since there’s less risk involved, secured loans tend to be easier to qualify for. 
• Unsecured loan: An unsecured personal loan doesn’t require any type of collateral. The benefit of this is that you don’t have to put your personal assets at risk, but these loans may be harder to qualify for.
• Fixed-rate loan: A fixed-rate loan has interest rates that don’t change over the life of the loan. As a result, you’ll have predictable monthly payments that are easier to budget for.
• Adjustable-rate loan: An adjustable-rate loan has variable interest rates that change depending on market conditions, so your monthly payments can fluctuate.

Your best loan option depends 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. If you don’t have an item of value to use for collateral, an unsecured loan might be the better option. Choose a fixed-rate loan if you prefer a payment amount that remains static.

Step 4: Compare interest rates and lenders

Interest rates for personal loans vary by lender and loan type. When assessing your loan options, compare loan terms and interest rates to determine the most affordable loan for you. Evaluate the interest rate and annual percentage rate (APR) offered by multiple lenders. Some lenders and types of personal loans offer 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. Consider all of your options, and remember to use the personal loan calculator to accurately understand costs.

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.

Prequalification is a preliminary step that allows borrowers to check their rates and explore different loan options. This step helps you confirm that you’re eligible for a personal loan while making sure you choose the best option for your situation. Not all personal loan companies offer prequalification, and it only gives you an idea of the value of your loan — it’s not a loan approval.

When you’re ready to get preapproved, your lender will do a soft pull on your credit report to better understand your financial situation. If you qualify, you’ll receive a conditional loan offer from your lender. A soft pull won’t affect your credit score, but once your lender does a hard pull on your credit report, your score may drop by several points.

Prequalification vs. preapproval

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.

Step 6: Collect the necessary documentation

After getting prequalified, you must submit the required documents to process the loan request. Your lender will require you 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.

When you apply with Rocket Loans, you can reach out to a team member any time in the application process. If you’re unsure about a detail on the application, we encourage you to reach out to us.

Step 7: Submit the loan application

The last step is to submit your application. Before you submit the form, always double-check the application to ensure you didn’t miss any details. Any missing information can delay the approval 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 about your financial information and employment 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. If you take too long to provide updates, your quote could expire, forcing you to start the entire process over again.

The bottom line: Secure the most affordable personal loan

Always do your research before applying for a personal loan. The Rocket Loans personal loan calculator makes it easy to understand your monthly payments and determine your best loan terms. Your financial needs and personal preferences all impact the type of loan you choose. By using our guide to the personal loan process, 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.