The interest you pay is expressed as an annual percentage rate (APR). The average APR on a personal loan is 9.41% as of June 2019, but it can range from 6% to 36% depending on your creditworthiness, including an examination of your income, debts, and credit score.

Key Takeaways

• 1. A personal loan can be used for almost any reason, from debt consolidation to unexpected doctor bills to taking a vacation.
• 2. Most personal loans do not require collateral, which makes them unsecured loans.
• 3. Personal loans must be paid back over a set term, usually two to five years.
• 4. The best personal loans will depend a lot on your creditworthiness and why you need the loan.

How to Qualify for a Personal Loan

There are many steps to take to qualify for a personal loan, with the first being to make sure that it’s right for you. For example, if you want to borrow money to remodel your house or buy a car, a home equity loan or an auto loan may come with a lower interest rate. Unlike unsecured personal loans based solely on your creditworthiness, these loans are secured by the home you want to fix up or the car you want to buy.

Although paying for a family vacation or consolidating debt fits into the personal loan category, you may also want to check into a 0% introductory APR credit card. If you go that route, however, be sure that you can pay off the balance before the 0% rate expires.

Decide How Much to Borrow

Remember that when you borrow money, you don’t just pay back the original loan. Except for that 0% card, paid off on time, you also pay interest or “rent” on the money you borrow. There’s no reason to pay interest on money you don’t need, so only borrow what is necessary. On the other hand, if you borrow less than you need, you may be forced to turn to more-expensive loan sources at the last minute.

Finally, make sure you can afford the payments on the amount you do borrow. There’s nothing worse than overextending yourself financially if the best thing would have been to wait a while until your finances improve.

Check Your Credit

As personal loans rely heavily on your creditworthiness, check your credit scores and obtain updated credit reports from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—before you apply. None of these actions, referred to as soft inquiries, will impact your creditworthiness or credit score. That only happens when you apply for a loan and the lender makes what’s known as a hard inquiry.

You can obtain a free credit report from each of the major reporting agencies once per year by visiting AnnualCreditReport.com. Many credit card and loan companies provide a free monthly credit score from one or more of the major credit reporting agencies. Services such as Credit Karma offer free credit scores, credit reports, and other financial services. Some, like Credit Karma, are actually free. Others offer a free trial then charge an ongoing fee. You can also pay for your credit score from the credit reporting agencies or from other online vendors.

Banks and Credit Unions

Institutions with a banking license or charter are governed by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA).

Local banks and credit unions are the first places many people think of when contemplating a personal loan. If you apply there, you will likely meet face to face with a loan officer, the experience will be personalized, and the officer can guide you through the application process smoothly. Compared to other options, banks tend to have higher loan qualification standards. If you are already a customer, the bank may cut you a break in that area, though.

The credit union qualification process tends to be less rigid than that of banks, and interest rates there are typically lower than at banks. You must, however, be a member in order to do business there. Neither banks nor credit unions typically charge loan origination fees, which is a plus.

Apply for the Loan

Once you’ve narrowed the field, it’s time to apply for a loan. If you plan to apply with more than one lender, try to bunch your applications together within a 14-to-30-day period. This is known as “rate shopping,” and multiple inquiries will be treated as one, having a smaller impact on your credit score.

Your preapproval letter should tell you what additional documentation is required for an actual application. Gather those documents up first. You will likely be required to provide proof of income (pay stubs, W2 forms), housing costs, debt, an official ID, and Social Security number (if not provided for the preapproval). Submit your application and documentation and await the results.