6 Steps to Take Before Getting a Personal Loan

Quick Answer

Before you apply for a personal loan, check to see if you can avoid a loan altogether or opt for a cheaper or more flexible borrowing option. If a personal loan is best for you, confirm the amount you truly need to borrow and compare offers from multiple lenders.

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Taking out a personal loan is a big financial decision, as you'll be adding a new, fixed monthly payment to your expenses each month. There are several steps you'd be wise to take before submitting a loan application, including confirming how much you need to borrow and double-checking whether an alternative to a personal loan might be a better option.

Personal loans are a type of installment loan―issued in a lump sum and then repaid with interest over a prearranged payment term. They can be useful as a form of debt consolidation or as a way to improve credit through a credit-builder loan. They're also available for specific purposes, like paying for weddings or a home remodel.

Follow these steps before getting a personal loan to make sure you've considered all possibilities for funding and that you get the best loan terms available to you.

1. Give Your Budget a Once-Over

If you're seeking a personal loan for a specific expense, such as a wedding, you might find that, by tweaking your budget, you're able to take out a smaller loan than expected—or avoid one altogether. That would mean skipping a hard credit pull, avoiding interest payments and minimizing your debt-to-income ratio (DTI).

There are tons of ways to reduce expenses, both on a one-time and an ongoing basis. Track your spending closely for a few months and see if you can cancel any subscriptions you're not using or opt for a cheaper cellphone plan. If you have good credit, refinancing your mortgage or student loans could net you more cash flow per month, allowing you to save up for big expenses and limiting the need for a personal loan. Just be sure to calculate any expenses you'll have prior to refinancing that could eat into your available funds.

2. Check―and Potentially Improve―Your Credit

Since your credit will be a major factor in determining the borrowing options available to you, make sure you have a solid sense for where you stand. Check your credit score using free services like Experian's, or those available through lenders or banks where you're already a customer.

Based on your credit profile, the credit score provider may give you some tips on how to improve your score. Perhaps you can reduce other outstanding debts, bring a past-due account up to date with a one-time payment or get added as an authorized user to another person's long-standing credit account.

Focusing on improving credit will be worthwhile if it gets you into the good-to-excellent score range. Good credit, or a FICO® Score of 670 or higher, can get you access to personal loans with lower interest rates, low or no origination fees and a wider variety of loan terms.

3. Explore Other Borrowing Options

Once you understand your credit score and borrowing needs, there may be options beyond a personal loan with fixed monthly payments that suit you better.

With good credit, you could qualify for a credit card with a 0% APR intro period, giving you the flexibility to make purchases up to your credit limit and pay them off according to the room in your budget each month. Just make sure you pay off those purchases before the 0% APR period ends to avoid accruing interest.

As a homeowner looking for funding for home renovations or emergencies, a home equity line of credit (HELOC) is also on the table—though you'll need to put up your home as collateral, which could be a risk if you can't make payments.

4. Confirm How Much to Borrow

Borrowing more than you need could make it harder to receive the lowest interest rate available. It will also make repayment a bigger burden on your budget. Calculate the absolute minimum you need to borrow in order to meet your goal.

That could mean asking a friend or family member for a small loan to limit the amount you'll have to pay back with interest, increasing your income or putting windfalls like tax refunds or work bonuses towards the expense.

5. Compare Offers From Lenders

If you've decided a personal loan is the best choice for you, shop around. Take a look at online lenders, banks you already do business with and credit unions. Primarily consider loans that cater to those with your credit profile, which is possible using marketplaces like Experian CreditMatch™.

Many lenders allow you to enter some basic information on their websites and see if you prequalify for a loan, which can save you time and let you focus on companies that are a good fit for your needs. Others may require you to fill out a full application to get an offer. But submitting multiple applications, and receiving multiple inquiries to view your credit report as a result, won't negatively affect your FICO® Score if you apply for each within a 45-day period.

6. Understand Loan Terms and the Disbursement Process

When comparing offers, look closely at the interest rate, monthly payment, repayment terms, origination fees, late fees and any interest rate discounts available. If you're opting for a variable-rate loan, check how the rate is calculated and how often it may change.

Once you've chosen a loan, note its total cost over time—the APR and all fees included—based on the repayment term you've chosen. Make sure the new monthly payment you've landed on fits your budget for the length of time your loan will be in repayment.

Get clear on the disbursement process, including how long it will take to get funds. Typically, you'll receive a lump sum and pay it off in monthly installments. Bank and credit union lenders may disburse personal loans one to five days after approval, while online lenders could fund loans the same day or the next day.

The Bottom Line

Choosing a personal loan requires careful thought and a deep understanding of your own financial profile. Your credit score will have a big impact on whether a personal loan is a strong option for you, and on the rate and terms you ultimately qualify for. Checking and monitoring your credit score regularly will help you identify when it's a good time to apply for a loan, and which steps it may make sense to take before applying.

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