Roughly 19.4 million Americans have a personal loan now, according to LendingTree — and if you’re looking to take one out too, you’ll need to familiarize yourself with the process. So we asked experts to share their insights on what you need to know about personal loans and how to get a personal loan.
What is a personal loan?
It’s a loan offered by online lenders, banks and credit unions — usually in an amount ranging from $1,000 to $100,000 — that you’ll repay at regular intervals, typically monthly over a period of one to seven years. Most borrowers take out a personal loan to repay debt, according to a survey conducted by Finder and Pureprofile in 2021, but these loans can be used for a variety of purposes, such as medical expenses, home improvements and more. The rate you’ll pay on a personal loan depends on your financial situation, including your income and credit score, so it’s important to shop around to get the best rate, and consider other, potentially lower cost options, like a home equity loan or HELOC. And this MarketWatch Picks guide will help you understand the pros and cons of personal loan, and what you should — and shouldn’t — use the money for.
Unsecured personal loan vs. secured personal loan
There are two main types of personal loans: Unsecured, which means it isn’t backed up collateral like a home or car, and secured, which means it is backed by collateral. Because an unsecured personal loan is riskier to a lender, it may come with a higher annual percentage rate.
How to get a personal loan
One of the big pros with personal loans is that they are often quick to fund: You can sometimes get the money within a couple of days. Here are the steps you should follow to get a personal loan.
- Ask yourself if you really need the money: “Start by figuring out how much you’re interested in borrowing and determine whether this is a want or something that you need now. Even though rates can be lower than other forms of debt, personal loans are still debt, so it can be risky and costly to use them for discretionary purchases,” says Ted Rossman, senior industry analyst at Bankrate. Experts say the smartest reasons to take out a personal loan are for large, one-time expenses like consolidating credit card debt or doing a home remodel. Just ensure you can repay the loan.
- Check your credit score: Assuming you’re ready to move forward, check your credit score. “This can help you understand just how likely you are to be able to get a loan and what terms you should expect to receive,” says Matt Schulz, chief credit analyst at LendingTree. Generally, a 740+ credit score, or a score in the mid-700s and above will give someone the best terms on a personal loan. Typically, lenders also look into your debt-to-income ratio and other factors like other outstanding debts that influence the likelihood that you’ll pay them back.
- Prequalify so you can understand what rates you might pay: Before kicking off the application process, Annie Millerbernd, personal loan expert at NerdWallet, says it’s a good idea to review your credit report, compare lenders and pre-qualify. “Pre-qualifying lets you preview your potential rate and loan amount without affecting your credit score. Once you’ve chosen a lender, you can usually apply online and then you’ll know whether you’re approved within a day or two,” says Millerbernd. Prequalifying online before submitting an application gives a borrower a preview of their loan offer and doesn’t affect credit score, so you can shop around at multiple lenders before choosing one.
- Gather all necessary documents and information: You may be required to provide documentation to verify your application information. “Creditors may request bank statements, pay stubs, utility bills or other documents to verify your identity and your income,” saysBobby Ritterback, president of personal loans for Best Egg.
- Do some comparison shopping: Comparison shopping is of utmost importance when considering a personal loan, pros say, as rates and fees can vary. “Look at things like the APR, fees, loan amount and duration to see which is the best fit for you,” says Schulz.
- Keep an eye on fees: Consider the total package of the rate and additional fees. “Origination fees vary widely, perhaps from 0% all the way to nearly 10%. If these are charged, they’re often deducted from the loan amount, so you may need to seek more money than you’d expect,” says Rossman.
- Apply: Next up, apply for the loan that suits you best. “You’ll need to provide documentation to verify your identity and other personal details, so it would be wise to make sure you have that gathered up before you apply,” says Schulz. The application process is generally quick, and if you’re approved you’ll often receive the funds within a day or two, says Rossman.
- Close the loan: After you’ve been approved and you accept the offer, you’ll close the loan which typically happens online. “Just make sure you understand the details of your personal loan agreement before you sign because what you don’t know can cost you,” says Schulz.