About 19.4 million Americans currently have a personal loan, according to LendingTree — and if you’re looking to get one, too, you’ll need to familiarize yourself with the process. So we asked experts to share their thoughts on what you need to know about personal loans and how to get a personal loan.
What is a personal loan?
This is a loan offered by online lenders, banks and credit unions – usually for amounts ranging from $1,000 to $100,000 – that you will repay at regular intervals, usually monthly over a period of time. from one to seven years. Most borrowers take out a personal loan to pay off 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 bills, home renovations, and more. The rate you will pay on a personal loan depends on your financial situation, including your income and credit score, so it’s important to shop around for the best rate and consider other potentially less expensive options, like a home equity loan or HELOC. And this MarketWatch Picks guide will help you understand the pros and cons of personal loans, 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 they are not backed by collateral like a house or car, and secured, which means they are backed by collateral. Because an unsecured personal loan is riskier for a lender, it may have a higher annual percentage rate.
How to get a personal loan
One of the great advantages of personal loans is that they are often quick to finance: you can sometimes get the money in a few days. Here are the steps to follow to obtain a personal loan.
- Ask yourself if you really need the money“Start by determining how much you’re interested in borrowing and whether it’s a want or something you need right now. Although rates may be lower than other forms of debt, personal loans remain debt, so it can be risky and expensive 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 the big ones. one-time expenses like credit card debt consolidation or home renovations Just make sure you can repay the loan.
- Check your credit score: Assuming you’re ready to move on, check your credit score. “It can help you understand how likely you are to get a loan and what terms you should expect to receive,” says Matt Schulz, chief credit analyst at LendingTree. Generally, a credit score of 740+, or a score in the mid-700s and above, will give someone the best terms on a personal loan. Typically, lenders also look at your debt-to-equity ratio and other factors, such as other outstanding debts, that influence the likelihood of you paying them off.
- Pre-qualify to understand the rates you could pay: Before starting 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-qualification 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 you’ll know if you’re approved within a day. or two,” says Millerbernd. Prequalifying online before submitting an application gives the borrower a preview of their loan offer and doesn’t affect credit rating, so you can shop around with multiple lenders before applying. choose one.
- Gather all necessary documents and information: You may be required to provide documents to verify your application information. “Creditors may request bank statements, pay stubs, utility bills or other documents to verify your identity and income,” says Bobby Ritterback, president of personal loans for Best Egg.
- Do comparison shopping: Comparison shopping is of the utmost importance when considering a personal loan, say the pros, as rates and fees can vary. “Look at things like APR, fees, loan amount, and term to see what works best for you,” says Schulz.
- Keep an eye on the fees: Take into account the total package of the fare and additional costs. “Setup fees vary widely, perhaps from 0% to almost 10%. If these are charged, they are often deducted from the loan amount, so you may have to ask for more money than expected,” says Rossman.
- Apply: Then apply for the loan that suits you best. “You will need to provide documents to verify your identity and other personal details, so it would be wise to make sure you have them together before applying,” says Schulz. The application process is usually quick, and if you’re approved, you’ll often receive the funds within a day or two, says Rossman.
- Close the loan: Once you have been approved and accepted the offer, you will close the loan which usually takes place 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 dearly,” says Schulz.