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Most of us will need to borrow money at some point in life, and one of the most common ways to do this is with a personal loan. You may need a loan to purchase a car, pay for a wedding, or perform home renovations, while others may need to consolidate debt or pay off medical bills.

Whatever your reason, securing a personal loan is often a good way to get you the money you need at a fair rate. However, anytime you’re dealing with large sums of money like this, preparation is key. We’ll review the steps you should take to get ready and other factors you’ll need to be aware of before you proceed. 

What Is a Personal Loan?

Personal loans are one of the most common ways for individuals to borrow money, and you can get them from banks, credit unions, or other lending institutions. With a personal loan, you’ll typically get the money in one lump sum and agree to pay it back with interest over a set number of years. Depending on your lender, there may be other fees involved, and all lenders will have their own requirements for qualifying.

💡 Personal loans can be used for various needs, including buying a car, paying for a wedding, or consolidating debt.

Personal loans can be used for all kinds of reasons, though they usually don’t go any higher than $100,000. Depending on what you’re purchasing, other types of loans may get you a better interest rate than a personal loan such as taking out a car loan, student loan, or home equity line of credit (HELOC).

Loan Comparison Guide

FeaturePersonal LoanCar LoanStudent LoanHELOC
PurposeAny purposePurchase a carEducation expensesHome improvements
Maximum AmountUp to $100,000Depends on car valueDepends on education costsDepends on home equity
Interest RateVaries, generally higherTypically lowerGenerally lowerVaries, can be low
Collateral RequiredSometimes (secured loans)Yes (the car)NoYes (home)
Repayment Term1 to 7 years3 to 7 years5 to 20 yearsVaries, often 10 to 20 years
AvailabilityBanks, credit unionsCar dealerships, banksFederal and private lendersBanks, credit unions

Secured vs Unsecured Personal Loans

Personal loans can also be subdivided into two categories: secured and unsecured.

  • Secured personal loan: When you take out a secured personal loan, you have to put up some kind of collateral that your lender can then take if you default on your loan. Common types of collateral are cars, boats, real estate, or savings bonds.
  • Unsecured personal loan: With an unsecured loan, you do not have to provide collateral. Because of this, it makes it riskier for the lender since if you default, they have nothing to recoup their losses. Unsecured loans often come with higher interest rates than secured loans.

Secured loans are best for those who can offer valuable assets and seek lower interest rates. They are a good choice when you need a larger loan amount and have confidence in your ability to repay.

Unsecured loans are a good choice for borrowers who lack collateral or prefer not to risk their assets. These loans work well for smaller, short-term needs such as consolidating debt or covering unexpected expenses. Although unsecured loans usually have higher interest rates, they offer quicker approval processes and less stringent requirements.

Choosing between these loans often depends on your financial situation and the specific reason for the loan.

How To Get a Personal Loan in 5 Steps

photo of a woman applying for a personal loan

1. Check your credit

To qualify for a loan, all lenders will perform a background credit check. However, you can get ahead of the game and check your credit score before you even step foot in a bank. By checking your credit score in advance, you’ll be able to rectify anything that may prevent you from qualifying. This can include fixing mistakes like names or addresses that are listed incorrectly, or lines of credit that were taken out in your name illegally.

📋 Check your credit score before applying for a personal loan to identify and correct any eligibility issues.

Looking up your credit score will also give you an idea of what you may qualify for, though all lenders will have their own requirements. In general, most people won’t be able to qualify for a personal loan unless they have a score of at least 580 which is considered fair to average. However, you should also know that the lower your score, the higher your rate will be. That said, your credit score is only one factor that a lender will look at when evaluating your creditworthiness. They will also look at your income and debt.

You can get a free copy of your credit report (note that this is the only federally authorized site to get a free credit report) every 12 months without affecting your score. This will include separate reports by Equifax, Experian, and TransUnion, the three largest credit bureaus in the country. If your score isn’t where you want it to be, you can make an action plan to start paying off debt faster noting that it can take several months to see a real change in your score.

2. Calculate how much you can afford

Before you meet with a lender, you should have a clear idea of exactly how much money you need and how you’ll use it. This will ensure you’re not taking out a loan that’s too big or too small, and that any money you do borrow is absolutely necessary. For instance, if you want a loan for a home remodel, you should base the amount on actual estimates you’ve received from contractors, not just a ballpark figure you’ve come up with.

📊 Calculate how much you can afford to borrow and repay each month to avoid taking out a loan that stretches your budget too thin.

There are a number of personal loan calculators online that can give you an idea of what your interest rate and monthly payments will be, but these should only be used to get a rough idea of your payments. Your annual percentage rate (APR) is determined by federal fund rates as well as your credit score, and these will fluctuate in response to the market.

If you have a credit score of above 720, you’ll likely get one of the lowest rates, while a score in the low 600s or high 500s will have the highest rates. When estimating your payments, it’s essential that you also include any origination fees which can range from 1% to 10% of the loan amount.

You can then use these estimates to decide whether you can afford the monthly payments that are required for the loan. If you discover they’re too high, you’ll need to take a hard look at the loan amount and see whether you can lower it. On the other hand, if the math checks out, you can start getting prequalified.

3. Get prequalified

When you get pre-qualified with a lender, they’ll perform what’s called a soft credit check which won’t ding your credit score. However, you should be prepared to give the lender your personal information, income details, the amount of money you’re seeking, and the loan’s purpose.

👍 Getting prequalified with multiple lenders allows you to compare loan offers and terms without affecting your credit score.

You don’t need to get pre-qualifying by every lender out there, but you should aim for at least three so you can get a good sense of your options.

4. Compare loan details

Once you’ve been pre-qualified and have the loan terms from at least three different lenders, you can carefully compare the details to see what your best option is. You want to look at the rate they’re offering, as well as the origination fees they charge and the terms of the loan.

🔍 Compare the APR, origination fees, and loan terms from different lenders to ensure you choose the best loan offer for your needs.

While you’ll most likely want to go with the lender that offers you the lowest APR, this may not always be the case. For example, if one lender has a lower APR, but much higher origination fees, you may end up paying more in the long run because of this. Always look at what your total costs will be after the loan is completely paid off.

5. Choose the best offer

Once you’ve decided on a lender you like, you’ll have to formally apply for the loan. To do this, you’ll need to submit income documentation, address verification, and provide a government-issued ID. This information must match what you told the lender when you were pre-qualified or else you may end up with a different APR.

💳 Make sure all information matches your pre-qualification details to avoid issues with your loan and credit score.

Your lender will then perform a hard credit check, which will ding your credit score by a few points so it’s important that you’ve done your homework and are sure you want to go through with the loan. Make sure to re-review the terms of your loans including the APR, origination fees, and timeline for repayment. Once you’re officially approved, it takes around a week for the funds to come through.

Qualifying for a Personal Loan

photo of a man applying for a personal loan

There are a few key factors lenders will look at when deciding whether you qualify for a personal loan. Ultimately, each lender will have their own methods for calculating your creditworthiness.

  • Debt-to-income ratio (DTI)
  • Credit history and score
  • Income
  • Collateral

Debt-to-income ratio (DTI)

Debt-to-income ratio is one of the most common calculations done by lenders to determine if you earn enough money each month to cover all your regular expenses and the new loan. DTI is determined by dividing the total amount you pay in monthly debt by your gross monthly income.

💳 Lenders consider your debt-to-income ratio (DTI) to determine if you can afford the monthly payments on a new loan.

Your monthly debt includes regular expenses like rent, car payments, student loan payments, or credit card payments, but does not include costs like utilities or groceries. Lenders typically like to see a DTI of less than 36% but many will go up to 45% or 50% depending on other circumstances.

Credit history and score

Lenders will look both at your credit score as well as your credit history when you apply for a loan.

💳 A solid payment history on major accounts helps prove your trustworthiness to lenders.

When reviewing your credit report they’ll look for past bankruptcies, outstanding debt, and your payment history on major accounts to make sure you’ve stayed current and are trustworthy to lend to again.


Lenders want to know that you have a steady source of income that covers all your monthly expenses, though each will have their own guidelines on how much this is.

💼 Lenders want to see a steady income source that covers all monthly expenses to ensure loan repayment.

They may also want to see that you’ve been at the same job or at least in the same field for a while to confirm your future employment is secure. 


If you’re pursuing a secured loan, you’ll be required to put up some collateral so the lender has something to fall back on should you default on your loan. However, you will need to have something of value to qualify for a secured loan which is typically a car, real estate, or investment portfolio.

🏠 Secured loans require collateral, like a car, real estate, or investment portfolio, to back the loan.

Final Thoughts

photo of a woman applying for a personal loan

Qualifying for a personal loan can be the best solution when you need a large lump sum of money for a specific project or purpose, but you’ll need to do your homework to make sure you’re getting the best deal possible.

💸 Personal loans provide a way to manage large expenses or consolidate debt into a single payment without overstretching your monthly budget.

Start by checking your credit and ability to pay, then begin researching the best personal loan lenders in your area before getting pre-qualified from at least three of them. Above all, make sure that you can pay back the loan in the time period allotted without stretching your monthly budget too far.

What credit score do I need for a personal loan?

There will always be a range of credit scores that lenders will accept for personal loans, but be prepared for differing APRs based on your score. An excellent credit score is generally thought to be over 720 and with a score this high you’ll generally be able to secure the best rate possible.

However, you can get a loan with a much lower score (say in the low 600s) but this will almost always mean a higher APR and larger monthly payments. If your credit score doesn’t qualify you for a loan (or for a good rate), you may be able to get a co-signer who can be on the loan with you.

What’s the difference between a lump sum loan and a line of credit?

Most personal loans are taken as a lump sum payment, meaning you get all the money at once and begin making monthly payments immediately for a set amount of time, usually between one and seven years.

On the other hand, if you qualify for a line of credit, you only access the money when you need to and your payments are based on how much of the credit you use, not the total amount available. These are most commonly seen with HELOCs, though you can usually find a lender who will extend a personal line of credit.

Are there alternatives to getting a personal loan?

If you need a large sum of money over $1,000, a personal loan issued by a bank or credit union is typically your only option. However, if you only need a small loan for a short period of time, you could consider getting a short-term cash advance on your paycheck. If you do decide to go this route, make sure you only work with reputable companies. Seeking out the best cash advance apps is a good first step.