7 Things to Know Before You Apply for a Personal Loan

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Before applying for a personal loan, learn how these loans usually work, how to compare offers, what to expect when you apply and why shopping for a loan is a good idea.

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A personal loan can quickly give you access to funds you can spend on almost anything. Personal loans might be used to pay for emergency expenses, consolidate higher-interest credit card debts and finance purchases when other types of loans don't make sense or aren't available. Personal loans aren't always the best option, however. Here are seven things you'll want to know before you apply.

1. How Personal Loans Work

Personal loans are a type of installment loan that you can use for almost anything, although lenders may have restrictions around using the funds for gambling, investing, business, higher education and illegal activities. As with other types of installment loans, you'll receive the entire loan amount upfront and they repay it with periodic installments—often, monthly payments—over your loan's repayment term.

Here are a few basics about personal loans.

Types of Personal Loans

Although personal loans are broadly used for personal expenses, there are still two common types of personal loans.

  • Secured loans: These require you to provide collateral for the loan—an asset that the lender can take if you don't repay the loan. With personal loans, this is often money that's locked in a savings account or CD. Some secured loans are named for the type of collateral they require. For example, an auto title loan uses your vehicle to secure a loan.
  • Unsecured loans: Unsecured loans don't require collateral. Lenders offer you these loans based solely on your creditworthiness and promise to repay the loan. However, lenders can still sue you for the unpaid debt if you stop making payments.

In general, secured loans may be easier to qualify for and offer more favorable terms. However, it's important to compare unsecured and secured loan offers to see which is best. More on this below.

Interest Charges

Personal loans tend to have a fixed interest rate, which means the interest rate you lock in when you accept the loan will never change. The loan's fixed repayment term and interest rate also mean your monthly payment will never change. If your credit improves, however, you could look into refinancing your personal loan to one with a lower interest rate to save money.

Paying Off the Loan Early

Most lenders let you pay off your loan without paying any additional prepayment penalties or fees. Paying off the loan could help you save on interest charges, but you won't be refunded any origination fees you paid upfront.

2. How to Compare Loan Costs

There are two primary costs to getting a personal loan:

  • Origination fee: This is an upfront fee you pay the lender when you receive the loan. The fee is often a percentage of the loan amount that's taken out of the loan's proceeds.
  • Interest rate: The interest rate is what's applied to your loan's principal balance to determine how much interest accrues.

Lenders will display an annual percentage rate (APR) range with their offers. The APR is an annualized rate that takes a loan's origination fee and interest rate into account.

Your loan offers' origination fees, interest rates and resulting APRs could depend on the lenders, your credit, how much you're borrowing and the repayment terms.

When gathering personal loan offers, you can compare APRs to see which one might cost you more in interest and fees. However, APRs are only one thing to consider when comparing loan costs. Also look at the monthly payment amount and total repayment cost.

For example, see how the monthly payments, APRs and total cost of a $10,000 personal loan can change depending on whether you choose a three- or five-year repayment term.

$10,000 Personal Loan With a 10% Interest Rate and 5% Origination Fee
Monthly Payment APR Total Cost
Three-year repayment $323 13.56% $11,616
Five-year repayment $212 12.24% $12,748

The longer-term loan has a lower APR, but that doesn't necessarily mean it's the best choice. Deciding which makes sense for you will depend on your financial situation and whether you'd prefer to pay less each month or less in total.

Personal Loan Calculator

The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.

3. Personal Loans Can Have Many Names

Lenders and review websites might give personal loans different names based on how borrowers plan to use the funds. These labels could include wedding loans, moving loans, medical loans, emergency loans or home improvement loans.

But the names are more marketing than material difference. Even if you apply for a so-called wedding loan, for instance, you'll still likely be able to spend the funds however you want once the money is in your account.

One potential exception is a debt consolidation loan, which is a personal loan that's intended for paying off existing debts. Consolidating your debt can be a good idea if it makes it easier to manage your bills, or you receive a lower interest rate that can save money. Some lenders might base your loan amount on your outstanding debt and send the loan proceeds directly to your creditors.

4. How You Plan to Use the Funds

Personal loans can be a helpful way to quickly get cash, but borrowing money isn't always a good idea—even if you qualify. For example, using a personal loan for discretionary expenses, such as a vacation, might be a bad idea that you wind up regretting later.

A personal loan also might not be the best type of financing for certain purchases. If you're buying a car, an auto loan secured by the car may offer a lower interest rate and fees. Even with a large consumer purchase, you might be able to avoid paying any fees or interest if you use a buy now, pay later plan or a credit card with an introductory 0% APR offer.

5. What Lenders Consider

Lenders may have minimum credit score requirements, and your credit score can directly impact your loan offers. Check your FICO® Score for free from Experian to see where you're at and what's impacting your credit score the most.

You can get a personal loan with almost any credit score, especially if you include high-interest loans, such as payday loans and their online alternatives. However, you may need a good to excellent score (670 to 850) to qualify for a large loan amount with favorable terms.

Lenders will also consider other factors when determining if you qualify for a loan, your loan amount and the loan's terms. For example, lenders may ask about your income and housing costs, and calculate your current debt payments from your credit report, to determine your debt-to-income ratio (DTI). These can help lenders determine whether you can afford an additional loan.

6. How to Apply for a Personal Loan

You might be able to get a personal loan at your local bank, but the easiest way to start is online. Many personal loans come from online-only lenders and marketplaces—companies that connect investors with borrowers.

The application process may vary depending on where you apply, but generally you will:

  1. Get prequalified. You might start by answering a few basic questions about yourself, why you want a loan and your desired loan amount. The lender may also review your credit report, but does so with a soft inquiry that doesn't affect your credit scores.
  2. Compare loan offers. When you prequalify for a loan, you may receive several offers with varying terms. You may want to try with other lenders if you don't get prequalified, as you likely won't qualify for a loan if you apply.
  3. Submit an application. Choose the loan offer that you prefer and then move forward with the official application. You may need to agree to a hard credit check, which could hurt your credit scores a little.
  4. Verify your information. As part of the loan application, you may need to submit documents the lender can use to verify the information you've entered. These could include a copy of a government-issued ID to verify your identity and recent statements from financial institutions that confirm your address and stated income.
  5. Sign the loan agreement. Once the lender confirms and approves everything, they'll send you the loan agreement to make everything official. Review the terms to see if anything has changed since you prequalified.

Once you sign the loan agreement, it usually takes around one to five business days for the funds to be in your account and available for you to spend.

7. How to Compare Loan Offers

Although applying for multiple loans might hurt your credit score, prequalification is a way to see which lender will offer you the best terms without hurting your credit. You don't need to accept a loan offer, and getting prequalified now won't necessarily hurt your chances of qualifying later.

Comparing your prequalification offers can be the best way to figure out which lender will offer you the best loan. And lenders might honor your prequalification offers for several weeks, giving you plenty of time to shop around.

Get Multiple Personalized Loan Offers

You can sign in to Experian and use Experian CreditMatch™ to get matched with personal loan offers from multiple personal loan providers based on your unique credit profile. You'll then have a chance to review the different offers and compare the loan amounts, monthly payments, interest rates and other terms to determine which is best.

Learn More About Personal Loans