Run the numbers
The last thing you or lenders want is for you to take out a personal loan and not be able to afford to pay it off. To avoid this, start by determining how much cash you’ll need, keeping in mind that some lenders charge an origination fee.
Use a personal loan calculator to find out what your monthly payment will be. This can be difficult if you don’t know what rates and repayment terms lenders will offer, but you can play around with the numbers to get an idea of what the loan will cost you and decide if your budget can handle it.
Takeaway: Before you apply for a personal loan, find out whether the lender charges an origination fee or other upfront costs. Figure out how much cash you’ll need after fees, and a monthly payment you can comfortably afford.
Check your credit score
Most lenders will run a credit check to determine how likely you are to repay your loan. While some online lenders have started to look at alternative credit data, they will still typically look at your credit score.
Personal loans typically require that you have at least fair credit — usually between 580 and 669. Good and excellent credit above 670 will give you the best chance of getting approved with a competitive interest rate.
If your credit score is low for other reasons, you may still have a chance to get a loan. But the interest rates and fees may be too high to make it worth it, so take steps to improve your credit before applying.
Takeaway: Checking your credit score will give you an idea of where you stand. The better your credit score, the more likely you are to get approved for a loan and the lower your interest rate could be.
Consider your options
Depending on your creditworthiness, you may need a co-signer to get approved for a personal loan with a decent interest rate. If you can’t find a co-signer, or the lenders you’re considering don’t allow co-signers, you may have the option to get a secured personal loan instead of an unsecured one.
Secured loans require collateral, such as a vehicle, a house or cash in a savings account or certificate of deposit, in exchange for more favorable terms. If you fail to repay the loan, the lender can seize the collateral to satisfy the debt.
You’ll also need to think about where to get a personal loan. With traditional banks, for instance, you may have a hard time getting approved if you have bad credit. Some online lenders, however, specialize in working with bad-credit borrowers, and some credit unions have short-term loans that serve as cheap alternatives to payday loans.
If you don’t meet the typical qualifications and your expenses can wait, take some time to build up your credit score so you can qualify.
Takeaway: If you don’t meet the qualification requirements for a decent rate, and you need a loan right now, a co-signer, a bad-credit loan or a secured loan could improve your chances of approval.
Choose your loan type
Once you know where your credit stands and consider your options, determine which type of loan is best for your situation. While some lenders are flexible in terms of how you use the funds, others may only approve loan applications if the money will be used for specific purposes.
For example, one lender might let you take out a personal loan to fund your small business, while a different lender might not allow you to use borrowed funds for business purposes at all. It’s generally smart to find a lender that is comfortable loaning you money for the exact reason you need it.
You can search the Bankrate personal loan marketplace for different types of loans, such as:
- Debt consolidation loans: Debt consolidation is one of the most common uses for personal loans. By taking out one loan to cover your existing debt, you decrease the monthly payments you have to worry about and receive one (potentially lower) interest rate.
- Credit card refinancing loans: Some companies, like Happy Money, specialize in loans for people looking to pay off credit card debt. Because personal loan rates are often lower than credit card rates, a loan may be a good way to clear your credit card balances and pay them off over a longer period.
- Home improvement loans: A home improvement loan may be a good option if you’re looking to pay for a large renovation up front without taking out a secured home equity loan.
- Medical loans: Because medical expenses are often unpredictable, a personal loan may be a good way to decrease the immediate financial burden and pay debt down over a number of years.
- Emergency loans: Emergency loans are useful for a number of purposes. A car breakdown, a smaller medical expense or a burst pipe may be good reasons to take out this type of loan.
- Wedding loans: Weddings and vacations can be pricey, which is why many people turn to personal loans to pay for them. This spreads payments out over years, so you don’t need to worry about paying for a special occasion all at once.
Takeaway: Find a lender that offers loans designed for your specific needs.
Shop around for the best personal loan rates
Avoid settling for the first offer you receive; instead, take some time and shop around for the best possible interest rate. Compare several lenders and loan types to get an idea of what you qualify for.
You can generally find personal loan offers from banks, credit unions and online lenders. If you’ve been a longtime account holder with your bank or credit union, consider checking there first. Often, showing that you’ve made positive financial choices for years means your bank or credit union may be willing to look past recent credit missteps or give you a better rate.
Some online lenders also allow you to get prequalified with a soft credit check, which won’t impact your credit score. Check with the lenders you are considering to see if they offer a prequalification process. Utilize this option to get a full understanding of the rates available to you.
Lenders that don’t offer a prequalification process will typically run hard credit inquiries as part of the loan application process. To limit the effect of hard inquiries on your credit score, it’s best to do your rate shopping within 45 days to count them as a single inquiry for credit-scoring purposes.
Takeaway: Don’t settle for the first offer you receive. Compare several lenders and loan types and check for a prequalification option before applying to avoid an impact on your credit.