How to Apply for a Personal LoanPublished on January 8, 2021 by Daniel Azzoli
There are all sorts of reasons you might consider applying for a personal loan. Maybe you’re trying to buy a house or a car, maybe you’re looking to consolidate multiple debts, or you’ve run into an emergency that you need financial help dealing with. Whatever the reason, let’s imagine that you have a valid one and you’re ready to take the next steps in the process of applying for a personal loan. Where do you start?
The first thing to do is to prepare yourself for the application process. Then, you’ll start to work your way through it! Today, we’re going to go over some of the important steps involved with applying for a personal loan to help prepare you for the next time you find yourself needing one!
1. Review Your Credit Report and Check Your Credit Score
When you’re applying for a loan, your credit report and credit score may play a big role in determining the rates, terms, and/or other important loan details (depending on the financial institution you’re applying with). That’s why it’s important to make sure you check in with the health of your credit.
Fortunately, checking your credit report doesn’t have to be complicated (or expensive). Every year you’re entitled to check your credit report once through each of the three major credit bureaus – Equifax, TransUnion, and Experian. To do this, just visit AnnualCreditReport.com to get started. Your report will show you the history of your credit entries. Keep an eye out for anything that looks fishy. If you spot an error on your report, you’re going to want to deal with it right away. This could be an honest mistake by a financial institution that you have a credit account with, or if you see something that looks unfamiliar, it could be a sign of identity theft. To learn more about the process of getting these errors removed, take a look here.
To see your credit score, you can either:
- See if it’s on your credit card statements as some companies have started to include this information.
- Buy it from a credit bureau.
- Look for a free service online that provides it.
What Makes up Your Credit Score?
While a financial institution will likely consider plenty of different factors (income, location, etc.) when deciding whether to lend you money or not, your credit score can tell a lender a lot about what you’re like as a borrower. Because of its importance, it helps to know what general factors contribute to the makeup of your score. These include:
- Your payment history (35% of your score): this encompasses both your on-time and late payments to accounts that are reported to credit bureaus.
- Accounts owed (30% of your score): This encompasses your credit utilization ratio, which is the amount of revolving debt you have in relation to how much credit you have available.
- Length of your credit history (15% of your score): Generally, having a longer history of positive entries in your credit report may be rewarded.
- Credit mix (10% of your score): This accounts for the different types of credit accounts you have, including personal lines of credit, installment loans, and more.
- New credit (10% of your score): This accounts for the number of hard inquiries on your report and recently opened accounts.
When you have an idea of what makes up your credit score, it may give you the opportunity to work towards making a positive impact on it. For example, now that you know that your payment history can have a huge effect on your score, it may encourage you to be more diligent in meeting your due dates.
Having your score in hand can also help to give you an idea of what types of personal loans you may be eligible for. If you have a score of around 620 (which would be considered subprime), it doesn’t necessarily mean that all offers for personal loans will be closed off to you, but it does mean that you may have to narrow your search to financial institutions that may cater to people in that bracket. While the loans that may be available to you at this level could come with higher rates – and should therefore only be used as a last resort in emergency situations – they may be able to help you if you’ve run out of options.
2. Determine What You Can Afford
Different personal loans can be structured in different ways, but generally speaking, each payment you make towards your loan may include:
- A contribution towards your principal (the amount you borrowed).
- Interest payments.
- An origination fee that’s spread out over the course of your repayment.
In some cases, there may also be potential late fees or other penalties depending on the loan and your ability to repay on time.
To get a better idea of what your payments could look like, look online for a reliable payment calculator to help you out. Make sure to enter the information correctly as this can give you an idea of what you’re looking at paying each month based on the details of your loan.
With this information, you’re going to want to be able to figure out if you can comfortably fit these payments into your budget and how much you’re able to pay at most. It’s important to have this information in hand before making any firm decisions.
3. Research Your Potential Options
When you’re looking for any sort of product, it’s always wise to assess the field. The same goes for personal loans. There are all sorts of financial institutions out there, so why not take your time and make sure you’re getting an offer that suits you the best?
First off, make sure you narrow your search to lenders that offer personal loans that align with your credit score at the time. If you have a near perfect score, use that to your advantage and look for favorable rates and terms. If your score is on the weaker side, there’s little point in spending your time looking for the types of loans we just mentioned. Instead, you may want to focus on financial institutions that offer personal loans for bad credit.
So, be thorough in your search and see what rates and terms are being offered by different lenders. Never settle for the first loan you stumble upon!
4. Get Your Personal Information in Order
In order to expedite the process as much as possible, you’re going to want to gather all pieces of personal information that you’re likely to need for the application process. These may vary between financial institutions, but they can include things like:
- Contact information
- Proof of employment and income information
- Bank statements
- Proof of assets
- Social security number
Again, these things can vary depending on the financial institution and the type of loan you’re applying for, but these are some general pieces of information you may want to have on hand.
5. Choose an Offer
While it may be exciting to be near the finish line, don’t rush this part. Even if there’s an expiration date on your loan offer in some cases, don’t be pressured into making a quick decision.
If you submitted applications with more than one institution, make sure to consider all offers closely. Research the lenders themselves, make sure they’re lending responsibly, and that the offer is right for you.
Don’t Rush the Process
While applying for certain types of loans may involve a more extensive application process, taking all the necessary steps can sometimes be a bit tedious. But nevertheless, they all deserve your attention. The theme of this process is that you’ll want to be as thorough and patient as possible, from the beginning research stages all the way through finally accepting a personal loan offer.
Make sure that you take this seriously, as the potential consequences of accepting a loan you can’t afford to pay back can be serious. We hope this guide helps you through this process!