What Is a Personal Loan? How It Works

Tips on Applying for a Personal Loan

Personal loans are a great tool for financing some of life’s most important—and unexpected—milestones. If you’re ready to apply for a personal loan, follow these steps:

1. Check your credit: Your credit history will be the biggest determinant of whether or not you’re approved for a loan, so it’s important you know where you stand. Most lenders will want to see a “good” credit score (620) or above to ensure you can be trusted to meet your loan terms. 

2. Decide how much to borrow: You may qualify for a $50,000 loan, but before you sign on the dotted line, you need to know how much you can realistically afford to borrow. Carefully consider your current and future financial situation before jumping into any personal loan.

Pro tip: Try our loan payment calculator to easily estimate monthly payments for different personal loan options. 

3. Know your consumer rights: According to the Truth in Lending Act, lenders must disclose the APR finance charges, principal amount, and any fees and penalties associated with a loan offer. If you come across a lender that refuses to share this information, you’ll want to look for a different lender. 

4. Gather essential documents: In addition to your credit report, potential lenders may also want to see the following documents to speed up the application process:

• Proof of your annual income
• Your debt-to-income ratio
• Your Social Security number
• Recurring monthly debt (like your house payment)
• Employer information
• Your cosigner’s financial information (if applicable)

5. Research loan options: Personal loan requirements and terms vary by the type of loan and lender, so you’ll want to research before applying. Details that may sway your decision include the loan amount, APR, monthly payments, loan term, secured or unsecured, and more. Ask lenders for this information in advance before applying for a personal loan. 

6. Submit your application: Once you’ve settled on a loan that meets all your requirements, fill out your application, read it carefully for typos or errors, and submit it to your potential lender. You’ll likely know whether your application was approved within a day or two whether your application was approved. 

How to Qualify for a Personal Loan

Each lender is different, so minimum requirements for personal loans vary. However, if you’re hoping to qualify for a large unsecured personal loan with a competitive interest rate, here are a few general requirements most lenders will want to see:

• A minimum credit score of 620
• A positive and established credit history 
• A debt-to-income ratio of less than 36%
• A steady income with proof of employment

Again, these requirements vary from lender to lender. In some cases, you may qualify for a loan with no credit at all. Some lenders even prioritize things like education and work history when evaluating applicants. Inquire with potential lenders before you apply for a personal loan to better understand what you need to qualify.

Personal Loan Alternatives

If credit history, high interest rates, or substantial fees are preventing you from applying for a personal loan, there are money-borrow alternatives that may be a better fit, like:

• Home equity loans: Home equity loans or lines of credit (HELOC) are secured by the equity a borrower has built in their home. Because this is a type of secured loan, interest rates tend to be much lower compared to an unsecured personal loan. The repayment terms are also longer than most personal loans, sometimes up to 20 years.
• Credit Cards: Credit cards allow borrowers to use credit and pay it back as they go, offering more flexibility than personal loans. Many credit cards also offer rewards like cash back or airline miles for money spent. 
• Personal lines of credit: Like credit cards, personal lines of credit allow you to borrow money and pay it back as you go. However, personal lines of credit have a set draw period—once the period is over, you won’t be able to tap your line of credit and will need to pay back your balance. Interest rates for personal lines of credit are typically lower than credit cards, so they’re ideal for large ongoing projects. 
• Retirement loan: If you’re looking for more relaxed loan requirements, you may be able to borrow from your employer-sponsored retirement plan in the form of a 401(k) loan. This is a great alternative for borrowers with less-than-stellar credit, but keep in mind that you’ll be restricted to your current retirement accounts, and you may have to repay the loan early if you leave your current job before the loan term ends. 

FAQ About Personal Loans

Still weighing your personal financing options? We answered some of the most frequently asked questions about personal loans to help with your decision. 

Will a Personal Loan Affect Your Credit Score?

Applying for a personal loan may cause a light dip in your credit score because lenders will run a hard inquiry on your credit. While a hard inquiry shouldn’t affect your credit score too much, it’s important to narrow down your options before applying to avoid multiple hard inquiries from multiple potential lenders. 

It’s also wise to wait to apply for a personal loan if you’ve just opened another line of credit, which could cause an even bigger drop in your score. 

Do You Need a Down Payment for a Personal Loan?

You do not need a down payment for a personal loan. However, In the case of a secured loan, you’ll need collateral, such as a car or money in a savings account. 

How Big of a Loan Can I Get with a 700 Credit Score?

You’ll likely be able to borrow upward of $100,000 with a 700 credit score, but other factors, including your income, employment status, and the type of loan you’re applying for, may also impact how big of a loan you qualify for. 

Find the Right Personal Loan for Your Needs

While there’s no limit on applying for multiple personal loans, having too much existing debt can make it harder to qualify for future loans or lines of credit. Lenders consider your overall financial picture when making approval decisions.

Researching personal loans can be daunting, especially if you’ve run into sudden unexpected expenses. The best loan for you will depend on your unique financial situation. Check out the personal loans at Credit.com to quickly compare options and see potential APR, terms, and maximum loan amounts.