If you need to borrow money to consolidate credit card debt, move cross-country or even finance an adoption, a personal loan can help cover your expenses without breaking the bank.
Most personal loans are unsecured, meaning they don’t require collateral such as a house or car. Loan amounts range from $1,000 to more than $50,000 and are paid back in fixed monthly payments, typically over two to five years.
Borrowers with good to excellent credit can choose among a variety of lenders, and will likely snag the most affordable interest rates. Options shrink and payments increase if you have no credit history or bad credit. But some lenders are willing to consider more than your credit score.
Here’s how to get a personal loan, step by step.
1. Check your credit score
A strong credit score gives you a better chance of qualifying for a personal loan and getting a lower interest rate. Assess your creditworthiness by checking your free credit score. In general, scores fall into the following categories:
- 720 and higher: Excellent credit
- 690-719: Good credit
- 630-689: Fair or average credit
- 300-629: Bad credit
Before applying, do what you can to build your score. The biggest factors affecting your credit score are on-time payments and the amount of credit you use relative to credit limits. Request your free credit report and dispute any errors it may contain.
2. Get pre-qualified for a loan
During pre-qualification, you may be asked for this information:
- Social Security number
- Monthly debt obligations (rent, student loans, etc.)
- Employer’s name, work address and phone number
- Address, email, phone number
- Previous addresses
- Date of birth
- Mother’s maiden name
- College name and major
You may not pre-qualify for a loan. Besides a low credit score, reasons for being denied include:
- Too little income
- Little or no work history
- A high debt-to-income ratio; below 20% is considered excellent
- Too many recent credit inquiries, such as credit card applications
3. Shop around for personal loans
With your pre-qualified online offers in hand, compare the amounts, monthly payments and interest rates. NerdWallet also recommends shopping for loans from a local credit union or bank. Credit unions may offer lower interest rates and more flexible terms, especially to borrowers with bad credit. They’re also your best shot for a small loan — $2,500 or less.
Few big financial institutions offer unsecured personal loans; Citibank, Discover and Wells Fargo are some that do. A local community bank may have better rates, especially if you have an existing relationship.
» MORE: Where to get a personal loan
4. Compare your offers with other credit options
Before you choose a personal loan:
See if you qualify for a 0% credit card. If you have good credit, you can probably get a credit card that has 0% interest on purchases for a year or longer. If you can repay the loan in that time, a credit card is your cheapest option.
Consider a secured loan. If your credit isn’t great, you may get a better interest rate with a secured loan. You will need collateral, such as a car or savings account. If you own a house, a home equity loan or line of credit can be significantly cheaper than an unsecured loan.
Add a co-signer. A co-sign personal loan may be an option for borrowers who don’t qualify for a loan on their own. The lender considers the credit history and income of both the borrower and co-signer in approving a loan and may offer more favorable terms.
5. Read the fine print
As with any financing, read the terms of the loan offers and get answers to your questions. In particular, watch for:
Prepayment penalties. Most online lenders do not charge a fee for paying off the loan early, called a prepayment penalty or exit fee.
Automatic withdrawals. If a lender requires payments be automatically withdrawn 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 any origination fees, should be clearly disclosed and figured into the annual percentage rate.
In addition, look for these consumer-friendly features:
Payments are reported to credit bureaus. Your credit score benefits if the lender reports on-time payments to credit reporting agencies — all lenders reviewed by NerdWallet do so.
Flexible payment features. Some lenders let you choose your payment due date, forgive an occasional late fee or allow you to skip a payment in case of hardship.
Direct payment to creditors. Some lenders will send borrowed funds directly to creditors, which is especially beneficial for borrowers who are consolidating debt.
6. Final approval
Once you’ve selected a lender that matches your needs, you’ll need to provide the following documents to formally apply for the loan:
- Identification: passport, driver’s license, state ID or Social Security card
- Verification of address: utility bills or copy of lease
- Proof of income: W-2 forms, pay stubs, bank statements or tax returns
The lender will run a hard credit check that may briefly knock a few points off your credit scores. Upon final approval, you’ll receive your funds according to the lender’s terms, typically within a week.
Taking out a personal loan can help you relieve your debt load and cover unexpected costs, but take stock of your options before settling on one choice. Find the lowest rates, borrow only what you need and repay the debt on time.
Updated Aug. 31, 2017.