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Shopping for a personal loan doesn’t have to be complicated. Understanding where to start, what you need in order to apply and how to compare offers can help you select the best personal loan.
Here are six steps to help you through the process of finding and getting a personal loan.
1. Check your credit score
First check your credit score to assess your financial picture. A high credit score gives you a better chance of qualifying for a personal loan and getting a lower interest rate.
Credit scores typically fall into these categories.
720 and higher: Excellent credit.
690-719: Good credit.
630-689: Fair or average credit.
300-629: Bad credit.
Looking at a less-than-friendly score? Fix any errors on your credit report that might be dragging down your score. You can request a free credit report and dispute wrongly reported missed payments or other inaccuracies it may contain.
Be sure to make on-time payments toward credit card and other loan payments, and keep your credit utilization (the amount of credit you use relative to credit limits) low as these are the biggest factors affecting your score.
» How's your credit? Check it for free on NerdWallet
2. Calculate your loan payments
Next, determine how much money you need from a loan. You’ll want to make sure that amount includes any fees the lender may charge. Origination fees, which range from 1% to 10% of the loan, are typically subtracted from the loan proceeds.
Looking at your loan amount and credit score will give you a better idea of the annual percentage rate and monthly payments you might receive on a personal loan.
The loan term also plays a factor in how much a loan can cost. A longer loan term means lower monthly payments, but you’ll end up paying more in interest.
Use the calculator below to see estimated payments based on your credit score, loan amount and loan term. The best personal loans have monthly payments that fit comfortably into your budget.
3. Get pre-qualified for a loan
Pre-qualifying for a personal loan gives you a preview of the offers you may receive from lenders. Many online lenders and some banks perform a soft credit check during pre-qualification that doesn’t affect your credit score.
During the pre-qualification process, you must typically provide personal information, such as your name, date of birth, income and loan purpose.
Pre-qualifying with multiple lenders lets you compare estimated rates and payment amounts.
To strengthen your application, consider a co-signed or secured personal loan. Adding someone with prime credit or an asset as collateral may help you qualify or get a lower rate. Note that both options have consequences for the co-applicant or collateral if you fail to repay.
» MORE: Personal loans with a co-signer
4. Compare lenders and shop around
You can find personal loans at online lenders, banks and credit unions. It's a good idea to shop around and compare loan amounts, monthly payments and interest rates from different lenders.
Credit unions may offer lower interest rates and more flexible terms, especially to bad-credit borrowers. They’re also your best shot for small loans — $2,500 or less. You must be a member of the credit union to apply for a loan and be ready for a hard pull with your application, which can cause your credit score to dip.
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5. Read the fine print
Before signing a loan, carefully read the terms and get answers to your questions. In particular, watch for:
Fees. Prepayment penalties — fees for paying off a loan early — are rare, but lenders may charge other fees, including origination and late payment fees.
Automatic withdrawals. If a lender automatically withdraws loan payments from your checking account, consider setting up a low-balance alert with your bank to avoid overdraft fees.
APR surprises. The total cost of your loan, including interest and any origination fees, should be clearly disclosed and figured into the APR.
Additionally, look for lenders that offer consumer-friendly loan features such as reporting payments to the three major credit bureaus, allowing borrowers to change their payment date or sending borrowed funds directly to creditors on debt consolidation loans.
6. Complete your application
Once you’ve selected a lender that matches your needs, you can formally apply for the loan. Application requirements may vary by lender, but you’ll likely need:
Identification: A passport, driver’s license, state ID or Social Security card.
Verification of address: Utility bills or lease agreement.
Proof of income: Pay stubs, bank statements or tax returns.
The lender will run a hard credit check that may briefly decrease your credit score by a few points and can show up on credit reports for 24 months. Upon final approval, you’ll receive your loan according to the lender’s terms, typically within a week. Once you have your funds, make a plan to pay off your loan and manage your personal loan payments.
» If your application is declined: Here’s how to recover