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7 steps for getting a personal loan (and what to do if you’re not approved)

Photo illustration of a $1 bill that has been cut out in the shape of a handshake.
Make sure your credit is in good shape.
Photo illustration by Fortune; Original photo by Getty Images

Whether you need cash in a pinch to tide you over, or funds to cover a major purchase, there’s likely a personal loan that is ideal for your budget and needs. The trick is finding the best personal loan for you.

But here’s the good news: Finding that loan doesn’t have to be a slog. A step-by-step process to review your finances and research your borrowing options can help you feel more confident when you finally sign on the dotted line.

What is a personal loan? 

A personal loan is a type of installment loan that can be used for nearly any purpose. When you take out a personal loan, you’ll receive a lump sum from your lender. Then you repay your loan in equal monthly installments for a fixed number of months.

Personal loans come in two varieties: secured and unsecured.

  • Secured personal loans are backed by collateral. Typically, secured loans have lower interest rates than unsecured loans. That’s because if you default on your payments, your lender can seize the collateral securing the loan to make itself whole. Personal loans can be backed by a bank account, vehicle, property, or other valuable asset.
  • Unsecured personal loans aren’t backed by collateral. Unsecured loans generally have lower interest rates than credit cards, but higher rates than secured loans. Higher interest rates compensate lenders for taking on more risk since there’s no collateral they can claim if you default on payments.

Unlike credit cards, which offer a revolving line of credit you can access until you’ve reached your credit limit, personal loans are for a fixed amount. You must apply for a new loan if you need additional funds during or after your loan term.

7 steps for getting a personal loan

When pursuing a personal loan, you must first figure out your current finances and borrowing needs to set yourself up for success. Then you can use that information to shop around for the best terms.

1. Determine your borrowing needs

If you’re looking for a personal loan, it helps to know how much you need to borrow. Borrowing too little can leave you with a gap in financing, while borrowing too much will result in paying unnecessary interest.

Luckily, there are a few ways to come up with a reliable number:

  • Do your research. While you can research costs for many major purchases online, other financial goals require more digging. For instance, your fertility clinic can help estimate costs for your family-building treatments. You can also get quotes from contractors to help ballpark that kitchen remodel.
  • Add in the extras. From sales tax and delivery charges to creating a cushion to cover unanticipated expenses, be sure to incorporate extras into your loan estimate. Extras can also include application and loan origination charges, though not all lenders have these fees.
  • Calculate your number. Add up figures from your research and anticipated extras to get a rough total loan amount.

Once you have an estimate of how much you need to borrow, it helps to revisit your monthly budget. Tim Schlueter, vice president and head of lending and strategic partnerships at Avant, says borrowers often overlook affordability when considering loan size. “As much as your credit score matters, the next most important thing a lender would consider is whether you can afford to pay for your loan,” he says.

Schlueter says an easy way to determine how much loan you can afford—even before you get quotes from lenders—is to look at your monthly disposable income. When you know how much you have left over after your current expenses, it’s easier to get an idea of the monthly payment you’ll need for a personal loan to make sense.

2. Check your credit

When you apply for a personal loan, your credit score is one of the top factors that lenders assess. So before you apply for a loan, it’s important to make sure your credit is in good shape.

How to check your credit report

To get an idea of the health of your credit, you can get a free copy of your credit report from Equifax, Experian, and TransUnion at Federal law states that you’re entitled to one free report from each credit bureau per year. However, you can request a weekly free copy of your report from all three bureaus through December 2023.

Be sure to scan your report for errors such as incorrect account statuses, accounts that aren’t yours, and other items that could bring your score down. If necessary, you can fix errors directly with the credit bureaus.

How to check your credit score

Credit reports don’t include your scores. So once you’ve reviewed your reports, it’s time to check your credit scores

There are two main scoring models that lenders may consider: FICO and VantageScore, though FICO is the most commonly used. You may already have access to one or both of these scores via credit tools offered by a current credit card or your bank. If you don’t, you can use a free site like Credit Karma for a peek into your VantageScore.

Borrowers with higher credit scores are typically rewarded with the lowest interest rates and best loan terms. Those with scores in the “good” range and above (a FICO score of 670+) will often have an easier time getting approved for a personal loan. But if your score is lower, you could still qualify for a personal loan from lenders who cater to those with less-than-perfect credit. However, be prepared to pay a higher interest rate.

3. Research lenders and eligibility requirements

Next you’ll want to get the lay of the land and explore top lenders for personal loans before you apply. To get an idea of potential lender options, you can:

  • Do a web search for “personal loan lenders” and read up on reviews
  • Ask friends, family, and colleagues for referrals to companies they’ve previously used
  • Research personal loan options at your existing bank or credit union

If your financial institution offers personal loans, you may want to begin your lender research there, says Josh Miller, head of consumer acquisition, marketing, and product development at KeyBank. “Oftentimes, it’s easier to get approval at that bank,” he says. Since you’re already a customer, it could bode well for you during the underwriting process since the bank already has access to financial data that other lenders wouldn’t, like your combined account value and direct deposit schedule—both of which can help determine your capacity to repay your loan.

Something to keep in mind is that each lender will have unique eligibility criteria for loan applicants. While it’s difficult to predict the differences, some of the most common things lenders look for in loan applicants include:

  • Employment history and verification
  • Your credit history and score
  • Current income
  • Debt-to-income ratio (DTI), which expresses how much you spend on monthly debt payments relative to your income (a lower ratio is better)

As you consider which lenders to include on your short list, take a moment to review each lender’s eligibility criteria. While finding this information can be challenging, look for a FAQ or knowledge base on the lender’s website. Here, you can often find the types of credit profiles a lender services or typical credit score ranges for the company’s borrowers.

4. Evaluate your offers

It’s time to get your loan offers and stack up your options. Many lenders let you check your rate and terms through a soft credit check, which means there’s no impact on your credit score. To get a quote, you fill out a short application and give a lender permission to take a high-level look at your credit. Lenders then compare those few details with their basic approval criteria and give you the interest rates, loan term lengths, and monthly payments you’d likely qualify for if you submit a complete application.

While soft credit checks are a plus for consumers, they aren’t a guarantee of approval. Instead, you can use them to identify lenders where you have increased approval odds and use the rates and terms to compare loan offers. When evaluating lenders, don’t forget to compare:

  • Annual percentage rate (APR), which is the loan’s interest rate, plus fees, expressed as a yearly cost
  • Loan amounts and which lenders can offer the sum you need
  • Repayment terms and how monthly payments and interest rates vary as terms get longer or shorter
  • Lender fees, which may include application, administration, and origination fees—all of which can increase your borrowing costs
  • Potential discounts, like a reduced rate for enrolling in autopay 

5. Gather documentation

Once you find your ideal loan, you’ll need to get your documentation together. Miller says those documentation requirements might be lighter if you’ve chosen a personal loan through your current bank. But if you’re applying through a bank where you’re not a current customer, Miller says most lenders will need the same documentation:

  • Proof of income, including recent pay stubs and sometimes, your most recent W-2 form
  • Proof of identity, including a government-issued ID (driver’s license, state-issued ID, or U.S. passport)

Some lenders might also ask for employment and position history, Miller says. Both speak to your capacity as a borrower, including your current and future income prospects. After all, being able to repay your loan today and in the future are equally important.

If you’re missing documents like pay stubs or your most recent W-2, your employer’s human resources department should be able to help. And if you’re self-employed, be ready to provide your recent business tax returns and bank statements to help verify income.

6. Apply

It’s time to make things official and apply for your loan. No matter your chosen lender, you can complete most personal loan applications online. Many also have functions that let you upload any supporting documentation necessary. Be sure not to skip any required fields, and if you have questions about the application, reach out to the lender’s customer service department.

Once you submit your loan, Miller says that underwriting and approval times can vary from same-day approval and next-day funding to those with a longer window. “Often, this is because the lender needs additional information from the borrower to get them approved,” he says. 

To expedite the underwriting process and get to a “yes” as quickly as possible, strive for accuracy in your application. For example, don’t list income you can’t document, and ensure the contact information for references and employment verification is accurate. In addition, if you’re a small-business owner, keep your tax returns and bank statements handy, as your lender will likely want a copy. Generally, the longer it takes to respond to a lender’s request for additional information, the longer your approval process.

7. Accept your loan

Once approved, your lender will ask how you want to receive your funds. If you bank at the same institution, your lender can deposit the money directly in your checking or savings account. With other lenders, you can request they electronically deposit your money into an account at your home financial institution.

But before you take the money and run, set yourself up for financial success. Enroll in autopay to keep payments in full and on time. And if you’re using a personal loan to consolidate debt, lock away any credit cards you’ve paid off with the loan proceeds to avoid temptation.

What to do if your loan application is rejected

If a lender can’t approve your application, all isn’t lost. These tips could help you get the money you need.

  • Avoid applying for multiple loans. Every complete application creates a hard inquiry on your credit report, which can lower your credit score. If you’re rejected, work on improving your approval odds before applying again.
  • Pay down your current debt. If a new loan would stretch your monthly finances to the max, paying down your current debt can increase your credit score approval odds when you reapply at a later date.
  • Increase your credit score. In addition to paying your bills on time and keeping existing balances low, there are more tools than ever to help boost your score—and they’re free.
  • Consider a cosigner. If you applied solo, adding your partner, spouse, or family member as a cosigner could increase approval odds if they have the income and good credit a lender needs to see. Keep in mind, however, that a cosigner is equally responsible for repaying the debt, so be sure they’re comfortable with this agreement.
  • Consider secured loan options. If you originally applied for an unsecured loan, offering up collateral could improve your chances of approval.

Miller says that for some borrowers, it pays to focus on monthly disposable income. By decreasing your current debt or increasing your income, you’ll be better positioned to take out a loan that you can afford—potentially with a lower interest rate than you’re offered today. “Affordability all anchors back to that monthly disposable income,” he says. 

The takeaway 

With a step-by-step process to help you assess your finances and lender options, you’ve demystified how to get a personal loan. So whether you apply today or in the future, you know how to determine your loan needs and get through the application process with as little stress as possible.

And remember: If a lender can’t approve your application today, the company may be doing you a huge favor. “We never want to put a customer in a position where they go negative. That’s bad for them and us,” says Schlueter of Avant. So if you get declined, it could signal that you need to check your current credit obligations and spruce up your finances. Doing so can help you become the type of borrower lenders want to see.

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