Personal Loans: How to Apply for a Loan in 4 Steps
When you need extra cash, a personal loan may be the answer. These can help pay for unexpected expenses, consolidate debt, or make major purchases. Still, before you go to the bank, there are some things you need to know and prepare.
Without further ado, let’s walk you through the typical requirements for loan eligibility, the documentation you should have ready, and, lastly, the step-by-step process of applying for a loan.
Requirements for Taking Out A Personal Loan
Requirements for taking out a personal loan vary by lender, but there are some general things you will need to consider. First and foremost, you will need to have a decent credit score, and lenders will also require proof of income and employment. If your credit isn’t in good standing, you may be asked to provide collateral in the form of a car or home equity.
Let’s discuss all these requirements in more detail.
Check Your Credit Score
When you apply for a personal loan, the lender will likely ask for your credit score. This number summarizes your creditworthiness based on your credit history, which is a record of your past borrowing and repayment behavior.
Credit scores typically range from 300 to 850 and depend on multiple factors, including the length of your credit history. A higher credit score indicates you are a lower-risk borrower, making it easier for you to get approved for a loan with favorable terms.
For example, you may be more likely to qualify for a personal loan with a lower interest rate if you have a high credit score. Some personal lenders do not have a minimum credit score requirement for applying for a loan, but others may dismiss you at the beginning of the process based on your score when making lending decisions.
If you think you need a loan, it might pay off to take your time and improve your credit score to get approved more easily or apply for personal loans with better rates. To do this, you can request a copy of your credit score report from one of the three major bureaus. If you see any discrepancies, it would be wise to dispute the discrepancies on your credit report and double-check your spending habits.
Proof of Income
Most lenders require borrowers to provide proof of income when they apply for a personal loan. This is designed to protect the lender by ensuring that the borrower can make regular repayments. There are a few ways to provide proof of income, such as showing pay stubs or tax returns.
Some lenders may also require borrowers to provide bank statements or other financial documents. Ask your lender for more information if you're not sure what you need to include. By taking the time to gather all the necessary documentation, you can increase your chances of getting approved when applying for a loan.
Choose the Type of Loan
There are two types of personal loans you can take out: Secured - i.e., with collateral - and unsecured. Unsecured loans will typically require a higher credit score for you to qualify, or they may mean much higher interest rates.
If you have a less-than-stellar credit score, you might have to go with a secured loan. The lender might require you to put up collateral. Collateral is an asset used to secure a loan, such as a piece of jewelry, a vehicle, or real estate.
If you default on the loan, the lender can seize the collateral and sell it to recoup their losses, which is why secured loans are usually reserved for those who apply for a loan with bad credit. The use of collateral puts the borrower at risk of losing their asset if they cannot repay the loan.
For this reason, it is essential to carefully consider whether you are willing and able to put up collateral before taking out a personal loan. It’s often a better idea to work on improving your credit score, rather than settling for a collateral-backed loan.
Prepare the Origination Fee
One common requirement when applying for personal loans is paying an origination fee. The lender uses it to cover the costs of processing and approving the loan.
While the origination fee varies between lenders, it’s typically a percentage of the total loan amount. The typical origination fee ranges from 1% to 8% of the total loan amount. In some cases, the origination fee may be rolled into the loan, so you won’t have to pay it upfront, but you’ll end up with a higher total repayment amount.
Documentation to Prepare When Applying for Personal Loans
Your lender will use your documentation to determine whether you are eligible for a loan, and, if so, how much you can borrow. If you have any questions about the specific things you will need to provide, ask your lender in advance. However, some things you’ll almost always need to bring are:
1. Personal Loan Application
A loan application is a document individuals or businesses submit to lenders to request a loan. The application will typically include information such as the applicant's contact information, employment history, and financial situation. The lender will use this information to determine whether to approve the loan.
In some cases, the applicant may be asked to provide additional things, such as tax returns or bank statements. The process can vary depending on the loan type, so if you’re not sure how to fill out a personal loan application, you can always ask the lender for additional information.
2. Proof of Identity
Proof of identity is used to verify who you are when you apply for a job, driver's license, passport, or government benefits. There are many different types of proof of identity, and the eligible documents vary depending on what you're using them for.
In general, though, you'll need to provide some combination of your full name, date of birth, photo ID, and address. The most common types of proof of identity documents asked for in the personal loan application process are driver's licenses and passports, but there are other options as well. For example, you can often use a birth certificate or a Social Security card as proof of identity.
If you don't have any of these documents, or if you're unsure which ones to use, contact the lender you're dealing with to see what should be done.
3. Employer and Income Verification
Employer and income verification can be done by contacting the individual's employer directly or reviewing public records. Verifying employment and income is an integral part of the application for a personal loan for several reasons.
For example, it can help determine whether an individual is eligible for certain benefits or assistance programs, as well as prevent fraud and identity theft. In some cases, employer and income verification may be required by law. Regardless of the reason, it’s vital to ensure the information you are using is accurate and up-to-date.
The Process of Applying for A Personal Loan
Applying for a personal loan doesn't have to be a daunting task. By following a few simple steps, you can quickly secure the financing you need.
1. Choose a lender
First, you'll need to find an institution to borrow from. There are many different lenders to choose from, so it's important to shop around and compare rates.
2. Figure out how much you would like to borrow
Once you've chosen a lender, you'll need to figure out how much you need to borrow. This will depend on your financial situation and what you plan to use the loan for. Do the math carefully, and don't overextend yourself - only take out as much money as you need, as that will be troublesome enough to repay.
3. Fill out applications
Once you've found a lender you're comfortable with, it's time to fill out a personal loan application. Some lenders will allow you to prequalify for a loan, which can give you an idea of how much you'll be able to borrow and what interest rate you'll get.
The application will ask for basic information about you and your financial situation. Be sure to answer all of the questions truthfully; there’s no point in lying, as the lender will double-check everything you give them.
Some lenders will allow you to apply online, or over the phone. Either way, read over the application carefully before submitting it. Don't hesitate to ask your lender for help if you have any questions. If you apply for a personal loan online, you can often find a live chat or a phone number to get more information.
4. After the Application
After you've submitted the application, the lender will review your information and make a decision. If you're approved, they'll send you a loan offer. Be sure to read it carefully before accepting; once you've signed it, you'll be legally responsible for repaying the loan.
What To Do If You Are Denied a Loan
If you're denied a loan, don't despair. You can do a few things to increase your chances of getting approved the next time around.
First, take a close look at the reason for your rejection. Typically, you’ll receive news of the status of your personal loan applications in a matter of minutes, but sometimes the lender won't make the reason obvious. If that’s the case, it could be helpful to ring the lender up and ask why.
If it's due to poor credit, you can work on building up your credit score by paying off debt and making all other payments on time. You may also want to consider applying for a secured loan, which uses collateral to reduce the risk for the lender, as the requirements for that are laxer. If you don't have any collateral, you may be able to get a cosigner to increase your chances of getting approved.
Finally, you can also read other people’s reviews of personal loans online and approval rates with a specific lender. Get familiar with a particular lender's requirements, and only apply to loans that you will likely get approved for.
What is the easiest loan to get approved for?
There is no easy answer to this question, as you’ll find that each lender has different requirements when you apply for a personal loan. However, secured loans typically have lower interest rates and are more likely to be approved than unsecured loans. This is because they require you to put up collateral, so the lender doesn't risk as much when approving you for the loan.
What is the easiest loan to get?
The easiest loan to get is typically a secured loan, as they have lower interest rates and are more likely to be approved. This is because applying for personal loans that are secured requires you to put up collateral, so the lender doesn't risk as much when approving you for the loan. However, you can also expect loans that are easy to get to come with a high-interest rate. If you're not pressed for time, taking some to improve your credit score before you apply might be a better option.
What do I need to apply for a loan?
You will need to provide the lender with basic information about yourself and your financial situation. This includes your name, address, employment information, and income. You may also need to provide bank statements and other financial documents.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
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