If you need to borrow money for almost any reason, a personal loan could be your best bet. Where credit cards come with variable interest rates and fluctuating monthly payments, personal loans have fixed interest rates, a fixed repayment timeline, and a fixed monthly payment that will never catch you by surprise. Plus, the best personal loans can come with interest rates as low as 5% APR, whereas the average credit card APR is currently over 17%.
There are a number of ways to use a personal loan to your advantage. If you’re swimming in high-interest credit card debt, for example, consolidating those balances into one personal loan can help you save money on interest and pay down debt faster.
Taking out a personal loan for debt consolidation can even help you increase your credit score by raising your overall available credit, thus lowering your credit utilization rate. And, of course, having just one payment to keep track of instead of several can significantly lower your chances of missing a payment — a major no-no when it comes to credit.
You can also use a personal loan for other goals outside debt consolidation. Other common uses for personal loans include:
- Home improvements
- Moving expenses
- Funding home repairs
- Medical procedures not covered by insurance, such as plastic surgery
How to Get a Personal Loan
Applying for a personal loan can be a lot easier than you think, and you can even do so from the comfort of your own home. Here are the steps you should take to get the best personal loan for your needs.
- Step 1: Name your “why.”
- Step 2: Check your credit score.
- Step 3: Figure out what you can afford.
- Step 4: Get pre-qualified.
- Step 5: Read the fine print.
Step 1: Name your ‘why.’
The very first step you should take is considering why you need to borrow the money — and whether your reason is good enough to justify going into debt. Also determine whether borrowing money is the real solution to your problem, or if there are steps you can take that won’t require you to add more debt to your life. Taking out a personal loan to consolidate debt can make a ton of sense, but you must also be prepared to stop overspending if you want the loan to benefit you in the end.
If you’re borrowing money for another reason, such as for the purchase of a new car to get to work or to pay for a wedding, list your reasons out and figure out how much you need to borrow to reach your goal. Make sure borrowing money will actually leave your finances better off in the end, and that you’re not simply borrowing to overspend.
Step 2: Check your credit score.
Once you have a clear reason to borrow and an idea of how much funding you need, your next step is checking your credit score. You need to see what kind of shape your credit is in to determine whether you’ll qualify for a personal loan, what kind of rate you can expect, and whether another option will leave you better off.
The following table shows how much interest you might wind up paying on your personal loan based on your credit score.
Average Personal Loan Rates by Credit Score
|Credit Rating||Credit Score Range||Average Personal Loan APR|
|Excellent||720 – 850||9.8%|
|Good||690 – 719||15.0%|
|Average||630 – 689||21.3%|
|Poor||300 – 629||28.2%|
Here’s a Catch-22: If you’re using a personal loan to repair your credit, your credit score may not be high enough to get approved. Worse, the hard inquiry on your credit that comes with applying for a loan will only ding your score further.
On the other hand, if your credit is excellent, a personal loan might not be the best option. Instead, you might want to consider getting a zero-interest credit card to transfer and consolidate your high-interest balances.
Step 3: Figure out what you can afford.
It’s a good idea to get a sense of how much you need to borrow and the APR you may need to pay. This information will make it easier to determine how much your new monthly payment will be.
We suggest playing around with a personal loan calculator to see how much you might owe each month based on your loan amount and potential APR. Once you have an idea of what your monthly payment could be, take a closer look at your income and monthly budget to determine if the loan is affordable for you based on your lifestyle and spending habits.
Step 4: Get pre-qualified for a loan.
Your next step is comparing lenders and getting pre-qualified for a personal loan. Fortunately, this step is way easier than it sounds! Where consumers once had to visit a brick-and-mortar bank to apply for a personal loan, you can now complete the entire process online via a personal loan marketplace, like Bankrate’s.
The good news is, you can get pre-qualified online without a hard inquiry to your credit report. The process is simple, and it can give you a better idea of how much you might qualify to borrow along with your interest rate and loan terms.
The information you’ll need to get pre-qualified for a personal loan includes:
- Your full name
- Employment information
- Loan purpose
- Estimated credit score
- Date of birth
- Social Security number
Step 5: Read the fine print.
After you get pre-qualified for a personal loan, you may be presented with several different loan options from different lenders. At that point, it’s up to you to conduct due diligence to find the right personal loan for your needs.
Ideally, you’ll find a personal loan with low or no fees, a competitive APR based on your credit score, and a monthly payment you can live with. Make sure to read all the fine print on your loan offer so you fully understand all terms and conditions.
Once you’re ready, you can apply for a loan offer and move forward.
Where to Get a Personal Loan
Now that you know the steps to research and apply for a loan, it’s important to know where you get one. We already mentioned how you can apply for a personal loan online, but there are other options to consider as well — each with their own pros and cons. The main institutions to turn to for personal loans include:
- Online lenders
- Credit Unions
#1: Online lenders
While you once had to speak with a human being to apply for a personal loan, the internet has ushered in a new wave of convenience. You can now apply for a personal loan online and from the comfort of your home, and you may never need to speak to anyone at all.
One of the biggest benefits of online personal loans is the fact that they let you compare multiple loans in one place. The is the opposite of what happens when you visit a bank to apply for a loan, since they’ll only show you the options offered at their own institution.
Borrowing money through an online lender can also help you get an answer — and the cash you’re looking for — a bit quicker than with a traditional institution. Online lenders are often a little more flexible and creative in their terms as well. So you might be able to get a more flexible payment schedule, or pay no origination fees, or even qualify for a loan without perfect credit. No matter where you go, make sure to shop for more than just an interest rate.
When it comes to getting a personal loan, you can also compare personal loans from your own financial institution if your account is in good standing. Your own bank is going to have a lot of your financial records on hand. In fact, you might already be pre-qualified for a personal loan by your bank precisely because they’re already aware of your financial needs and habits.
#3: Credit Unions
Once you check with your own financial institution, shop around at two or three other lenders to see if you can’t get more favorable terms. Nonprofit credit unions often have lower interest rates or more forgiving qualification criteria than their for-profit competitors.
Also note that many credit unions let you get a loan online. If you bank with a credit union already, their website is a good place to start your search.
The Bottom Line
A personal loan can be just what the doctor ordered to get your finances back on track — if you use it wisely and don’t view it as a license to continue spending beyond your means. Just remember that you will have to pay back every penny you borrow, plus any interest and fees.
There are certainly cases where taking out a personal loan is the best option, particularly if your goal is consolidating high-interest debt. If you’re having trouble managing your debts, talk to someone at your bank or credit union about a personal loan, or look into some of the online lenders on the market.