Whether you need to consolidate credit card debt, cover unexpected medical bills or pay for personal events such as a wedding, a personal loan can help.
There are personal loans available to borrowers across the credit spectrum. However, it's important to think carefully about the process to ensure that you get the best loan for your needs and budget.
Here are seven steps to guide you through the process.
- Check your credit score
- Calculate how much you need to borrow
- Calculate an estimated monthly payment
- Get prequalified with multiple lenders
- Compare all loan terms
- Choose a lender and apply
- Review the offer and accept the loan
1. Check Your Credit Score
You don't need a perfect credit score to get approved for a personal loan. In fact, some lenders specialize in working with borrowers with bad credit. However, some of the best personal loan interest rates are reserved for borrowers who have a good FICO® Score☉ or better.
| FICO® Score Ranges | |
|---|---|
| Exceptional | 800 - 850 |
| Very good | 740 - 799 |
| Good | 670 - 739 |
| Fair | 580 - 669 |
| Poor | 300 - 579 |
You can check your FICO® Score for free with Experian to get an idea of where you stand. If your score needs some work, check your Experian credit report to understand which factors are impacting your score. Then, take action based on what you find.
Some possible ways to improve your credit before applying for a personal loan include the following:
- Pay down credit card balances.
- Get caught up on past-due payments.
- Avoid applying for new credit unless you need it.
- If you find information on your credit report you believe to be inaccurate, you have the right to dispute it with the appropriate credit reporting agencies (Experian, TransUnion and Equifax).
- Register for Experian Boost®ø and get credit for positive rent, utility, phone and streaming payment history.
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2. Calculate How Much You Need to Borrow
Understanding how much money you need can help you avoid borrowing too much or too little. Additionally, you may be able to weed out certain lenders based on the range of loan amounts they offer.
Keep in mind, too, that some lenders charge an origination fee, which is deducted from your loan disbursement. As a result, you may need to borrow a higher amount to account for the fee.
Example: Let's say you need to borrow $10,000, and the lender charges a 5% origination fee. Simply divide $10,000 by 0.95 to get roughly $10,527, which is the amount you need to borrow to cover the fee and still get a $10,000 loan disbursement.
Learn more >> How Much Can I Borrow With a Personal Loan?
3. Calculate an Estimated Monthly Payment
Once you know how much you need, research personal loan interest rates to get an estimate of what you might qualify for based on your credit profile. Then, use a personal loan calculator to calculate your monthly payments and total interest charges over the life of the loan.
Running the numbers can help you determine whether you can afford the payments on the amount you want to borrow and give you an idea of the total cost.
Example: Let's say you want to borrow $10,000 and, because you have a solid credit history, you believe you can qualify for an interest rate of around 10%. With a three-year repayment term, your monthly payment would be $332.67. Alternatively, a five-year repayment term would give you a monthly payment of $212.47.
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†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
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4. Get Prequalified With Multiple Lenders
You may be tempted to just apply with the bank or credit union with which you already have a financial relationship. However, while it can be helpful to have all of your finances under one proverbial roof, you may be able to save more money with a different lender.
The good news is that many of the best personal loans offer prequalification. This allows you to view and compare rate quotes with a soft credit inquiry, which won't impact your credit score.
The process typically only takes a few minutes, so try to get prequalified with at least three to five lenders to get a good sample of offers.
Tip: Lenders who seem too good to be true often are. If they require an upfront payment or guarantee approval, it's a strong sign of a scam.
5. Compare All Loan Terms
While a personal loan's interest rate is the most important factor to consider, it's also crucial that you consider other loan terms, including:
- Credit score requirements: Not all lenders disclose their minimum credit score requirement publicly. However, you can get a sense of your approval odds and how your credit score might influence your loan terms by getting prequalified.
- Repayment terms: Personal loans may come with terms ranging from one to seven years, but some lenders offer more flexibility than others.
- Fees: Personal loans typically don't come with application fees or prepayment penalties, but some lenders charge origination fees. In some cases, the fee can be as high as 12% of the loan amount. If you have great credit, try to focus on lenders with no origination fees.
- Loan restrictions: You can generally use a personal loan for nearly anything, but some lenders may spell out some limitations. For example, you may be prohibited from paying for college expenses or buying investments. What's more, some lenders may only offer loans for specific purposes, such as debt consolidation.
- Funding time: Once you're approved, most lenders will fund your loan within a few days. But if your need for cash is urgent, try to find lenders that offer next-day or possibly even same-day funding. If you're consolidating debt, check to see if the lender is able to make a direct payment to your creditors.
- Discounts: Some lenders offer an interest rate discount if you set up automatic payments or if you have an existing relationship with the financial institution. Just keep in mind that lenders may incorporate those discounts into your quote.
6. Choose a Lender and Apply
Once you've decided which lender has the best offer, you can typically apply via the lender's website. The process can vary slightly depending on which one you choose, but in general, you'll need to provide the following information:
- Identity: You'll need to share your name, date of birth and Social Security number. You might also need to upload a copy of your driver's license or another government-issued photo ID.
- Contact information: This includes your address, email address and phone number.
- Employment and income: You may need to share your employment status, including your employer's name and contact information, as well as your gross annual income. In some cases, you may need to provide documentation, such as a recent pay stub, W-2 form, tax returns or bank statements.
- Housing status: You may be asked if you rent or own your residence and what your monthly payment is.
- Loan terms: You'll be asked how much you want to borrow and how you plan to use the funds. You may also have the option to share your desired repayment term.
Once you submit your application, the lender will formally review your creditworthiness. You can often get a decision within seconds, though some lenders may take more time to evaluate your financial and credit profiles.
Learn more >> Where Can I Get a Personal Loan?
7. Review the Offer and Accept the Loan
Unlike prequalification, an official loan application typically requires a hard inquiry, which can impact your credit score, albeit temporarily. This deeper dive into your creditworthiness allows the lender to give you a firm offer, which may or may not be the same as the initial quote.
Once you're approved, review the offer and the loan's terms and conditions to make sure it's the right fit. If your terms aren't quite what you expected, you can go back and apply with a different lender. If you're happy with the terms, sign the loan agreement, and the lender will disburse the loan funds based on its funding timeline.
Tip: If you're denied, lenders are required to inform you the reason why in an adverse action letter. After reviewing the letter, you can take action to remedy any issues before applying again.
Learn more >> If I Get Approved for a Personal Loan, Do I Need to Accept It?
Frequently Asked Questions
Yes, it's possible to get a personal loan with bad credit. It's important to note, however, that bad-credit personal loans typically charge higher interest rates and fees. In some cases, the annual percentage rate (APR) can exceed 100%.
As a result, it's important to carefully consider your reasons for borrowing money and to look for opportunities to improve your credit before applying.
When you apply for a personal loan, the hard inquiry can knock a few points off your credit score, and if you decide to open the account, it could reduce the average age of your accounts, which can have a slight negative impact on your score.
How much you owe and how the loan contributes to your credit mix can also influence your credit score. However, the most important factor is your payment history. If you always pay your bills on time, a personal loan can help you build your credit. If you miss a single payment by 30 days or more, however, it can damage your score considerably.
While you're assigned a repayment term when you accept the loan, you can pay it off faster if you prefer. In general, personal loan lenders don't charge prepayment penalties, and accelerating your repayment can help you save money on interest charges.
Once your loan payment is 30 days late, lenders may report it to credit bureaus. A late payment stays on your credit report for up to seven years and can negatively affect your credit score. You might also have to pay late fees, have your account sent to collections or even face a lawsuit.
If you don't think you can make your next loan payment, reach out to the lender to explain your situation. Your lender may offer one of the following solutions:
- Loan deferment and forbearance: These solutions can temporarily pause your loan payments.
- Loan modification: With this option, the lender may adjust your loan terms to lower your monthly payments.
You might look for an alternative to taking out a personal loan if you can't get approved, or if you only receive offers with high rates. A few popular alternatives include:
- Credit card
- Home equity loan or home equity line of credit (HELOC)
- Personal line of credit
- Peer-to-peer loan
- Life insurance policy loan
- Retirement plan loan
- Mortgage refinance
Your creditworthiness and the reason why you want to get a personal loan can also impact which option may be best.
Learn more >> Alternatives if You Can't Qualify for a Personal Loan
Get Matched With Personal Loans Based on Your Credit Profile
Getting prequalified with multiple lenders can be time-consuming. Fortunately, Experian allows you to get matched with offers from multiple lenders at once based on your Experian credit profile. This service speeds up the process for prequalification and also makes it easier to compare loan options side by side.