Maximizing your odds for approval: how to apply for a personal loan

Adulting doesn’t mean you have all the answers. It means you’re willing to go out and find them.

A personal loan is a tool you can add to your financial toolbelt. You can use a loan to reach a goal or cover an expense—whatever your financial priority happens to be. Here’s what you need to know about personal loans so that when the time comes to apply, you know what you’re doing and what to expect. 

Applying for a personal loan in 7 easy steps

You could just go straight to a personal loan site, fire up the application screen, and start typing. However, you’ll have a better experience if you follow these recommended steps in order.

Step 1: Check your credit 

Most personal loan companies focus on a specific type of customer, loan purpose, and/or credit rating. You won’t know where to apply if you don’t have a handle on your own situation.

Start with your credit reports. You can get them for free online at annualcreditreport.com. You get one for free from each credit bureau (Equifax, Experian, and TransUnion) every 12 months. Review at least one of your credit reports for accuracy, because sometimes errors can lower your credit score. If you find anything that doesn’t look right, follow the bureau’s instructions to ask for a correction. (If you do find errors, you'll need to go through the correction process separately for each bureau.)

The government doesn’t provide free credit scores, but you don’t have to pay for that, either. Check with your bank or credit card issuer. Often you can check your credit score for free by logging into your account online. Equifax and Experian offer free credit scores, as do many free credit score websites. If the site asks for a credit card number, click away and start over. You don’t have to pay.

Step 2: Determine how much you need to borrow

It might be tempting to apply for the biggest loan you can get, but don’t. Instead, consider how much you truly need and what you can afford to repay each month. Your loan’s monthly payment depends on the amount you borrow, the interest rate, and loan term (number of years for repayment) you choose.

Try to borrow the least amount you can get away with and repay it in the shortest time you can manage. That strategy leaves you some wiggle room in case you have another financial need before this loan is paid off.

Step 3: Research your loan and lender

Once you know how much you need, look for a lender offering the loan amount and repayment term you want. Is the lender’s maximum loan amount high enough for you? How many years do you get to repay your loan? How quickly does this lender make underwriting decisions? How soon will you receive your money?

Put lenders that let you apply for a no-risk preapproval at the top of the pile. Don’t waste your time or rack up a lot of credit report inquiries looking for loans in all the wrong places.

Step 4: Gather your information and documents

Once you have a lender in mind, get ready to apply. They’ll want to know who you are, what you earn, and how much you owe. Have your current and previous employment and address information ready, going back at least two years. Know the account balance and minimum payment for each of your debts, and how much income you have each month before taxes.

Expect to provide some proof of ID. Your lender may be able to access your payroll information from just your social security number and your employer’s name, but be ready to supply a recent pay stub (or tax return if you’re self-employed or on commission). The same goes for banking information. You might just need to provide your bank account number, or you might be asked for copies of your latest statements.

Finally, prepare an explanation for any credit report blemishes. If a collection account happened because of an illness, put that in a letter. If you’ve taken steps to avoid missing payments in the future, explain what you’ve done. It could make a difference.

Step 5: Apply for the loan

Today, most personal loan applications take place via websites or apps. It’s the fastest and easiest way for many people, and having access to online lenders gives you more options. However, feel free to contact your lender in person or by phone if you prefer. The way you apply doesn’t impact your loan approval chances.

Many lenders let you prequalify for a loan without generating a hard credit inquiry. A soft inquiry is a risk-free way to find out if you meet your lender’s guidelines. It can also tell you how much you might be able to borrow and what the interest rate and payment might be. Adjust your loan amount if needed.

With your documents and information in front of you, work your way through the lender’s application. Get help for any question or field you don’t understand. The lender should be helpful. If they aren’t responsive, that’s a red flag.

Once you hit “submit,” expect a decision fairly quickly. If your application is approved, the lender may ask for documentation like pay stubs or bank statements to finalize your loan approval. Provide these items ASAP. 

Step 6: Review your loan terms

Once you have an approval, review the terms of your offer carefully. (It’s nice to be loved, but don’t get so excited that you just start signing.) 

What’s the interest rate? What’s the APR? The APR includes your origination fee and other charges, so it’s a good way to compare offers. How many years will you have to repay the loan? Can you pay it off early? What’s the monthly payment? What are the loan fees, and the total cost of your loan over its term? Is there a penalty if you want to pay off the loan ahead of schedule?

Step 7: Get your money

Once you’ve provided everything the lender has asked for, okayed the loan terms, and signed your final agreement, the lender transfers money to you. This can take anywhere from a few hours to a few business days.

There are three common ways for personal loans to fund:

1. If you’re using a loan to consolidate debt, the lender may pay off the consolidated accounts directly. 

2. You could pick up a paper check or have one mailed to you.

3. The lender can electronically transfer the funds directly into your bank account. This is the most common delivery method. 

Your first personal loan monthly payment is due in the next 30 days after the funds are paid to you. Most lenders allow you to set up automatic loan payments. It’s a good idea because personal loans can be very helpful for building a good credit score if you pay on time every month. Take advantage of any help your lender gives you to make that happen. 

How to get approved for a personal loan

Personal loan providers have a greater challenge than mortgage or auto lenders because in most cases, the loans are unsecured. All the lender can rely on is your promise to repay. So it’s up to you to make the lender believe your promise. Following these tips can help you do that and increase your chances for personal loan approval.

Know your credit score before applying

Checking your credit before applying helps you zero in on the best loan for which you qualify (saving you money). It also protects your credit score, because you won’t waste hard inquiries applying for loans you can’t get (yet).

Target lenders that offer risk-free prequalification

Many personal loan providers allow you to prequalify without a hard credit inquiry. They use special underwriting software to determine if you are credit-worthy and can afford the loan’s monthly payment. 

Don’t borrow too much

It can be tempting to borrow a little more than you need, but that can lower your chances of loan approval.

Get your discounts

Discounts on your loan fees or interest rate don’t just save you money—they improve your chances for loan approval. A lower rate means a lower payment. The lower the payment, the less income you need to qualify. 

Ways to get an interest rate discount include:

• If you borrow for debt consolidation, let the lender pay off your creditors directly

• Show proof of sufficient retirement savings 

• Add a qualified co-borrower to your application. This can also help improve your odds of approval.

Try a secured loan

Pledging collateral that the lender can take if you don’t pay up can improve your loan approval odds. Acceptable collateral includes real estate, vehicles and luxury items like valuable art or jewelry.