A small personal loan can be a great way to fund unexpected expenses without exhausting savings or taking on more debt. But before you apply, it’s important to review the borrowing requirements of each lender.
The approval process varies between lenders but most require prequalification and a complete application with income, employment and debt-to-income information. Look for a lender that uses multiple metrics to assess creditworthiness and offers competitive rates.
1. Determine Your Needs
Before shopping around, determine what you need the loan for and how much you can afford to pay back each month. This will help prevent you from overborrowing and ending up with unaffordable payments down the road. You can use a personal loan calculator to help estimate monthly payments.
You can shop around for a personal loan through banks, credit unions and online lenders. Lenders review your credit, income and debt-to-income ratio when determining lending eligibility and terms. Once you find a lender that offers the loan amount and repayment terms that you need, you can submit an official application. Most applications require proof of income, employment details, government-issued identification documents and bank statements. Having these documents ready in advance can speed up the application process.
When shopping for a personal loan, compare interest rates and fees between lenders to find the best deal. Look at the annual percentage rate (APR) as well as other fees and charges, such as origination fees, balloon payments or prepayment penalties.
Check the minimum and maximum loan amounts offered by each lender. Some lenders offer flexible loan amounts, while others have stricter limits. If you need a large amount of money, consider an alternative to a personal loan such as a line of credit or a home equity loan.
If your credit is poor, consider improving it before applying for a loan. You can raise your credit score through a variety of means, including paying off outstanding debt and increasing your income. A higher credit score can also unlock better loan terms, such as lower interest rates.
Shop for loans that meet your requirements, such as those with a fixed rate and repayment terms of two to five years. Avoid payday loans or any other short-term loans, as these tend to have high interest rates and can trap borrowers in cycles of debt.
Some lenders may allow you to pre-qualify for a personal loan without a hard inquiry on your credit. However, it’s important to remember that a preapproval is only an estimate and does not guarantee approval or specific terms. If you’re shopping for a small personal loan, you should apply with at least three lenders to get a full picture of the rates and terms available.
2. Shop Around
A personal loan can be a good option for those who need extra cash to cover a large expense or for other reasons. However, it’s important to shop around before you apply. This helps ensure you’re getting the best loan terms and rates, which can save you money in the long run. It’s also helpful to prequalify before applying, which allows you to see your rate without impacting your credit score. Shopping around can also help you determine how much you can borrow and how much the loan will cost over time.
While you may think a personal loan is only available through banks or credit unions, this isn’t always the case. In fact, you can find a personal loan through many types of lenders including credit card issuers and online lenders. Online lenders often offer a wide range of loan products and may be more flexible with credit requirements.
In addition, some lenders specialize in lending to certain groups of borrowers, such as military members. These lenders typically have shorter application processes and may be able to offer lower interest rates than traditional lenders. Additionally, some online lenders allow borrowers to apply without becoming a bank or credit union member.
If you’re planning to use a personal loan for home improvement or other projects, consider checking with local banks and credit unions first. These lenders often have lower rates than larger institutions and can work with borrowers to customize a loan to fit their needs. They may also be able to offer other financial perks, such as cash advances or credit cards.
Personal loans are unsecured installment loans, which means you don’t need to put up collateral, such as your house or car, in order to secure the loan. However, you may be required to provide some form of verification, such as pay stubs or W-2s, depending on the lender and your creditworthiness.
3. Get Pre-Qualified
Getting pre-qualified helps you narrow your choices and save time when shopping for a personal loan. It also allows lenders to assess your creditworthiness without a hard inquiry on your credit report. Lenders may offer pre-qualification online or by phone, and you can often get a quick response within minutes. If you qualify, you will receive a preliminary offer that includes an estimated borrowing limit, annual percentage rate, fees and monthly payment. If you don’t qualify, the lender will share an explanation of why and provide tips to help you improve your credit score and credit history so you can become a good candidate for a personal loan in the future.
Review your credit history and determine what you need a personal loan for (home improvement, vacation, debt consolidation) and how much you can afford to pay in monthly payments. If you have a good to excellent credit score, you’ll likely qualify for the best terms and rates. If your score is in the fair to bad range, you can still find lenders that offer loans, but you’ll likely pay higher interest rates.
Once you know your needs and have a rough idea of how much you need to borrow, check with several lenders to see if they offer pre-qualification. Some lenders will allow you to shop for loan options and pre-qualify without affecting your credit score, while others may require you to formally submit a full application and provide documentation like W2s to verify your income and employment.
Once you choose a lender, review the loan terms and fees and determine if they meet your expectations. If they do, apply and wait to receive your funding once the loan process is complete. It typically takes just a few days for the money to arrive in your bank account, depending on the lender and how quickly you submitted the formal application. Be sure to review and understand all the documents you’re required to sign before accepting a personal loan. Some lenders may charge a late fee or penalty if you don’t repay the loan in full and on time.
4. Apply
If you’ve narrowed your options and determined the right type of personal loan to meet your needs, the next step is to apply. You can do this online, via telephone or in person at a bank or credit union branch. Lender requirements vary, but most will ask for basic information about your income, employment status and more. You may also need to submit supplemental documentation, such as paystubs or W2s. It’s important to remember that each time you complete a loan application, the lender performs a hard inquiry on your credit report, which can temporarily lower your score.
While the credit score and debt-to-income ratio criteria vary by lender, most offer unsecured loans in the $1,000 to $25,000 range. Some lenders also offer secured personal loans, in which you pledge collateral to secure the loan (typically a home or car). The type of loan that you choose will largely depend on your financial circumstances and preferences, as well as how quickly you need funds.
Once you have chosen a lender, check out the rates and terms on offer to ensure they fit your budget. You can find out what rates you’ll qualify for without affecting your credit score at most personal lenders and lending marketplaces, such as Upstart.
You’ll want to look for a low interest rate, the ability to borrow with a co-borrower or co-applicant, and any other fees associated with obtaining and repaying your loan.
If you’re interested in a particular lender, make sure to review its customer support resources and read reviews from past and current borrowers. While this won’t be a huge concern during the honeymoon phase of your loan, it will be an important consideration if you encounter financial hardship down the road. Once you’ve been approved, the lender will disburse your funds and send you loan documents that include a summary of the terms and conditions. If you accept the terms, your funds should be available within one business day1. If you prefer to shop around for a personal loan, consider applying for multiple offers simultaneously through a lending marketplace to limit the number of hard inquiries on your credit report.