Personal loans can provide some much-needed flexibility if you’re looking to cover an emergency expense, consolidate your debt, or finance a costly project. Unlike other types of loans, you can use a personal loan for a number of things.
If you’re interested in securing a personal loan, you’ll need to submit a loan application for approval from your potential lender.
What is a personal loan?
A personal loan is an unsecured loan granted to a borrower based on their creditworthiness. Secured loans like auto or mortgages require collateral, such as your home or car. With a personal loan, your credit history, debt, and overall personal finances speak for themselves.
You can use a personal loan for pretty much anything you’d like. As long as you meet your lender’s repayment terms, a personal loan can be a worthy option if you have multiple financial obligations like an upcoming home improvement or costly medical bill. It also provides a low-interest alternative to a credit card. Some borrowers may even use a personal loan as a debt consolidation loan if they have mounting credit card debt, for example.
Choosing a lender
So, you’ve decided that you’re ready to apply for a personal loan — now you’ll need to research and compare lenders to find the best personal loan rates and products for your personal finances.
Many online lenders and brick-and-mortar lenders like your preferred bank or credit union, offer prequalification forms that can give you a better idea of the kinds of loan offers that you may qualify given your credit score, income, desired loan amount, and more.
After completing prequalification applications from any lenders you’re considering, you can take some time to compare offers and select the lender that makes the most sense. You’ll still need to fill out a more detailed and formal application for approval, but prequalifying for a loan can help expedite the process.
Completing your personal loan application
Once you’ve spotted a loan option that may work for you, it’s time to fill out an application and submit it for consideration. When choosing a personal loan offer, you should be sure to consider the loan amount, the repayment term, the interest rate offered, and any origination fees associated with the processing or funding of your loan.
You’ll want to gather any necessary documents ahead of time to make the application process run a lot smoother. Your lender will likely ask you for key identifying information and financial information, such as:
Your full name
Date of birth
Contact information
Social security number or a similar identification number
Employment information
Income information and recent pay stubs
Credit score or a recent copy of your credit report
The desired loan amount and loan term
Loan purpose (although not every lender will ask for this)
Depending on the lender you select, you may be able to fill out your form online or in person. Processing times vary from lender to lender, but it can take as long as a few weeks to receive a decision regarding your application.
You should also be aware that any time you submit a new loan application, this will trigger a hard credit inquiry. Lenders will conduct a credit check to learn more about your financial history, how you’ve managed debt in the past, your current financial situation, and how capable you are of taking on a new loan.
Loan approval and funding
Your lender will take some time to review your application and any supporting documents you’ve submitted to determine if you meet their standards for an official loan offer.
Having good credit, a steady income, and a low debt-to-income ratio (DTI), and providing your lender with all the documents and information they need to make a final decision about your application can help the process run smoothly.
Once you’ve been made an offer, you’ll receive your official loan agreement that will outline key information about your loan like your monthly payment amount, annual percentage rate (APR), repayment terms, origination fee, prepayment penalties, and more.
After carefully reviewing your loan documents, you can sign your agreement and await your funds. Funding times will vary depending on your lender, but typically, you can expect to receive your funds within a few business days.
What to do if your loan application is rejected
If your lender comes back to you with a rejected application, your lender is required to let you know why your application was turned down, per the Equal Credit Opportunity Act. Common reasons for this could include a low credit score, high DTI, or lower income.
Knowing why your application was rejected can help you determine the best course of action to improve your chances of getting approved in the future. This could mean paying off debt, securing a co-signer for your loan, or working on boosting your income.
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