How to Take Out a Personal Loan [9 steps]
Need to fill gaps in your budget, cover a large expense, or pay down high-interest debt at a lower cost? Understanding how to take out a personal loan is the first step to securing the funds you need to cover temporary, short-term expenses.
The steps for taking out a personal loan tend to be similar, no matter which lender you choose. Here's how to take out a loan in 9 simple steps:
How to take out a personal loan in 9 steps
Know your numbers
Check your credit score
Compare lender options
Check your interest rate
Choose a lender and apply
Accept the loan
Spend your funds
Start making payments
1. Know your numbers.
Before you take out a loan, know how much you need and how much you can afford to repay monthly.
Borrow only what’s needed to cover your goal, like paying off credit card debt, covering an emergency expense, or making home improvements. And remember: lenders will consider basic information, including your income, when providing repayment terms, but it’s up to you to conduct a thorough review of your financial picture. Before you apply for a personal loan, decide what personal loan payment will fit your budget. Consider your monthly expenses and all of your potential sources of extra income. That way you can compare loan offers based on what you know you can afford.
2. Check your credit score.
Lenders are more likely to approve loans to borrowers with high credit scores, and they may offer those borrowers more favorable terms—like lower interest rates. Review your credit report and run a credit check before you try to take out a loan. You can get one free credit report per year from each of the three credit bureaus: Equifax, TransUnion, and Experian. Make sure to check for any inaccuracies on your report. If you find any, report them immediately to one of the credit bureaus.
If your credit score is in a lower range, consider taking steps to improve your score before applying for a personal loan. Low credit scores can lead to higher interest rates or prevent you from qualifying, so it's in your best interest to do what you can to make improvements before applying for a loan or borrowing money.
3. Compare lender options.
There are more options than ever for personal loans. You can borrow from a brick-and-mortar bank, credit union, or peer-to-peer online lending marketplace. The best personal loan for you will depend on your personal finances, as well as the amount and purpose of the loan.
Lenders may have a different application process for small business loans, and some financial institutions do not make business loans at all. There are also specific types of loans for patient financing. Deciding on the right lender will often depend on what you need.
4. Shop around.
When comparing lenders, make sure to compare APRs—that’s the total cost of your loan including interest fees—and try to find a lender that doesn’t charge prepayment penalties or hidden fees. But make sure to look at the whole package. Though interest rates, costs, and repayment terms are a big part of the decision, take the time to read reviews and other customer experiences before committing. A company with great customer service could help you navigate the process and make your personal loan experience stress-free.
5. Check your interest rate.
When you submit a loan application for a personal loan (or any credit card account), your credit score might take a hit. That’s because a personal loan application—like applying for a new credit card—triggers a hard inquiry on your credit report. Inquiries aren’t necessarily bad, but having too many might look like a red flag. Luckily, many online lenders, like LendingClub Bank, let you check your loan rate and review your potential loan offers before applying without impacting your credit score.
6. Choose a lender and apply.
Once you’ve found a lender that works for your personal finances, complete an application. You may be asked to provide proof of income—like pay stubs, business records, or tax documents—and proof of residence.
If for some reason you are declined for a personal loan, try not to worry. You’re not alone and there is a path forward. Taking a few steps to improve your personal loan eligibility can set you up for success next time you apply.
7. Accept the loan.
Your lender may send a check for the loan amount or make a direct deposit to your bank account. In the case of a balance transfer loan, they may pay your creditors directly.
8. Spend your funds.
Use the money you borrow for its dedicated purpose, especially if you’re consolidating debt or paying down other bills. Do it right away so you don’t pay any more in interest than you have to—and so you’ll be less tempted to spend the money on something else entirely.
9. Start making payments.
Before your first payment is due, set a due date reminder in your calendar, set up auto pay, or use the amortization method. Being 100 percent sure you’re making payments on time can help you to build, maintain, and protect good credit history. Plus, paying off your personal loan on time could improve your credit score, too.
4 Reasons to Take Out a Personal Loan
A personal loan is an unsecured loan that can be used for almost anything. Whether you need to consolidate credit card debt, fund a major purchase, or pay for a large unexpected expense, a personal loan can help you get the money you need without breaking the bank.
You need to pay for a large purchase, project, or event.
If you need to make a major purchase―like replacing an aging furnace, deck, or roof―the interest rate on a personal loan might be better than the annual percentage rate (APR) on your credit card or in-store financing options. If you take out a loan and pay the seller in cash, you may end up better off in the long run.
You want to consolidate credit card debt.
Debt consolidation is a way to combine multiple debt accounts so you can pay the total down faster and save money on interest rates. If you’re struggling to pay off debt, in many cases you can qualify for a lower interest rate and a monthly payment that’s more in line with your budget.
LendingClub Bank, for example, offers balance transfer loans and joint applications to help members save money and get the lowest possible rates. In fact, more than 3 million LendingClub members have used a personal loan to pay down their high-interest debt.
You have unexpected medical or emergency expenses.
Rather than charging unexpected costs to a high-interest credit card, a personal loan can get you the money you need without the stress of credit card debt. A personal loan not only gives you the time you may need to pay the money back, but it can also save you money on interest when compared to a credit card. When deciding between the two, compare APRs to find out which is the best rate.
You want to improve your credit score.
A personal loan may help improve your credit score—especially if your current credit report shows credit card debt as your main type of credit. A personal loan can help diversify your account mix and may lower your credit utilization ratio, both of which are important factors in determining your score. Plus, making on-time payments can help boost your payment history.
Taking out a Personal Loan FAQ
These are some of the most commonly asked questions about how to take out a personal loan.
Is it a good idea to take out a personal loan?
It depends on your current financial situation and what you need. The majority of personal loans are unsecured, which means they don’t require collateral. That means if you have a high credit score, steady income, good credit history, and low debt-to-income ratio, a personal loan could be a more cost-effective solution for funding a large or unexpected expense. If you’re trying to purchase a home or car, however, secured loans—like a mortgage or auto loan—might be the better option. Before you apply, make sure you meet the personal loan eligibility criteria.
How to take out a small personal loan?
A small personal loan may help cover a temporary spike in your monthly expenses or an unanticipated financial burden. Generally not more than $3,000, a small personal loan can be a great way to borrow exactly what you need without relying on credit cards.
Because they are typically less profitable than larger loan amounts, mortgages, or auto loans, some major banks won’t offer small personal loans. LendingClub Bank, however, offers qualified borrowers loan amounts as low as $1,000 (and all the way up to $40,000).
How do I get started?
If you’re ready to start exploring personal loan options, start by checking your rate with a few different lenders. This lets you collect your potential loan offers so you can decide where to apply for your loan. At LendingClub, you can check your rate for free without impacting your credit score.