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Personal Loans

If I Get Approved for a Personal Loan, Do I Need to Accept It?

If you apply for a personal loan and get approved, you're not obligated to accept the offer. This is important to know because not all personal lenders allow you to get preapproved, so you may need to apply just to get an idea of what terms you qualify for.

Before you apply for a personal loan, however, it's important to know how the process works, how it can affect your credit and what to consider before you start shopping around.

How Do I Apply for a Personal Loan?

Getting a personal loan is a relatively easy process. You can apply for one with a bank, credit union or an online lender. Depending on which institution you're working with, you may be able to get preapproved before you officially apply.

The preapproval process includes sharing a little bit about yourself and your partial or full Social Security number, and the lender will run a soft credit check and share one or more quotes for rates and other terms. This process won't affect your credit, so it's a good idea to look for lenders that offer it.

After you've been preapproved and you like what you see—or if the lender doesn't offer preapproval—you'll submit an official application. During this part of the process, you'll typically need to share more information, including your:

  • Social Security number
  • Address
  • Proof of income and employment
  • Government-issued photo ID
  • Bank information
  • Purpose for the loan
  • How much you want to borrow

Once you submit the application, the lender will review the information you've shared and check your credit reports and score. It may also calculate your debt-to-income (DTI) ratio—your monthly debt payments divided by your gross monthly income—to see whether you can afford to take on more debt right now.

If your application has been approved, the lender will contact you with the terms and typically allow you a certain period to determine whether you want to accept.

Instead of going with your own bank or credit union, or picking the first offer that comes your way, it's essential that you shop around and compare several lenders, so you may need to go through this process more than once.

While that may sound redundant, different lenders have different criteria for how they determine rates and judge applicants. Checking terms with multiple lenders gives you the chance to make sure you get the most favorable terms you qualify for.

Do I Have to Take the Loan I've Applied For?

If a lender has approved your application for a personal loan, you're not required to take it. This is an important distinction from credit cards, where your account is opened immediately upon approval.

But there are a couple of things to consider before you start submitting applications all over the place. For starters, some personal lenders may charge a nonrefundable application fee, which you won't get back if you decline the loan offer.

Most major lenders don't charge this fee, though some of them opt for an origination fee that gets deducted from your loan disbursement if you accept. So if you come across one, it may be best to avoid applying unless you're confident that's the lender you're going to choose.

The second thing to consider is that almost every time you submit an official application for credit, it will trigger a hard inquiry on your credit report. Unlike a soft credit check, a hard credit check will affect your credit scores, usually knocking a few points off with each inquiry.

The more you apply, though, the negative effect of the hard inquiries can be compounded and make it more difficult to get approved. What's more, each hard inquiry stays on your credit report for two years.

What to Consider Before Applying for a Personal Loan

Personal loans are a big financial commitment and can often take years to repay, so it's important to understand both the benefits and the drawbacks before you apply for one.

Pros of Getting a Personal Loan

There are a few situations where a personal loan may be a better option than other available credit options, and here's why:

  • They can help you eliminate credit card debt. If you can qualify for a personal loan with a lower interest rate than what you're paying on your credit cards, the loan can help you consolidate your credit card debt and save money as you pay it off. Moving your credit card debt over to a personal loan will also reduce your credit utilization rate, which can help improve your credit score.
  • They're often unsecured. Many personal loans don't require collateral to get approved. If you're doing home improvements, for instance, a home equity loan or line of credit may be cheaper than a personal loan, but you risk losing your home if you can't repay the debt.
  • They can fund quickly. If you need money fast to cover emergency expenses, some personal lenders can provide funds as early as the next day, or at least within the week.

Cons of Getting a Personal Loan

While there are some clear advantages to using a personal loan in some situations, it's not always the best option available. Here are some reasons why:

  • They can be expensive. It's possible to find personal loans with interest rates in the single digits, but the average rate on a two-year personal loan is 10.63%, according to the Federal Reserve. If you need a longer repayment term or your credit is less than perfect, you may end up with a rate that's much higher. Some of the most popular personal lenders charge rates upwards of 30% with some borrowers. In addition to a high interest rate, you may also be on the hook for an origination fee, which can be as high as 8% among top lenders.
  • They can have short repayment terms. Depending on the lender you choose, you may only have a few years to repay the debt you've incurred. If you're looking to fund a large purchase, such as a new car or a home improvement project, a short repayment term could make the monthly payments unaffordable.
  • They may be unnecessary. With most personal loans, you can use your funds for just about anything. But just because you can take out a personal loan for a vacation, college costs or a big-ticket item you don't need, it doesn't mean you should. In situations like these, it may be a better financial decision to save up for the purchase or use a different type of loan, such as student loans, that may be a better fit.

How a Personal Loan Can Affect Your Credit

As mentioned before, applying for a personal loan can result in a hard inquiry on your credit report, which can temporarily drop your credit score by a few points. Also, taking on the new monthly payment will increase your debt-to-income ratio, which can affect your chances of getting approved for credit in the future.

And, of course, missing payments or defaulting on a personal loan can have a significant negative impact on your credit score.

There are, however, some potentially positive effects a personal loan can have on your credit. For starters, taking out a loan and making payments on time and in full each month can establish a positive payment history, which is the most significant factor in your credit score.

Also, a personal loan can improve your credit mix—the different types of credit you have—and reduce your credit utilization rate if you're using it to pay down credit card debt.

As you consider whether a personal loan is right for you, think about how it can impact your credit for better and for worse.

Check Your Credit Score Before You Apply

Having a great credit score can improve your chances of getting approved for a personal loan with favorable terms. If you're not sure where your credit stands, check your credit score from Experian for free to see. If it's considered good or excellent—typically a FICO® Score* of 670 or higher—you'll have better approval odds.

If it's less, though, or if you want to maximize your chances of scoring a low interest rate, consider working on improving your credit before you apply for a personal loan.

Also, to help simplify the shopping around part of the process, consider using a tool like Experian CreditMatch™, which can provide quotes from multiple lenders in one place based on your credit score.

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