Questions to Ask When Applying for a Personal Loan

When applying for a personal loan, you’ll want to do some research and ask yourself some questions ahead of time. From borrowing amounts to qualification requirements to securing funding, the decision to take out a personal loan is an important one. It’s important to know how a personal loan will impact your long-term finances in order to make a good borrowing decision. Here are some questions to ask when applying for a personal loan.

1. How do I qualify for a personal loan?

Because most personal loans are unsecured, lender criteria is typically based on creditworthiness. However, personal loan qualification requirements vary by lender, so you’ll need to check with each lender you’re interested in about whether you may be a good fit for a personal loan. Some, for instance, will only accept borrowers with certain income levels or debt-to-income (DTI) ratios.

Others may be more open to less-than-perfect credit as long as you meet other requirements. A cosigner can be helpful for borrowers worried about qualification (or affordability) because of bad credit. Not all lenders allow for cosigners, so check before you decide to pursue a certain institution.

2. What is my credit score?

In general, your credit score is one of the most important factors in determining whether you qualify and what APR you’ll receive. The higher your credit score, the lower your APR may be. Your credit score may also determine how large of a loan you may be eligible for.

In April 2022, for example, the average APR for those with a credit score of 720 or higher was 10.21%. That’s compared to those with a lower score of 640 to 659, for which the average APR on closed personal loans was 29.53%.

Before you apply for a personal loan, check your credit report and look for opportunities to improve your score. You can check your credit score with LendingTree Spring, and look up your credit report by visiting AnnualCreditReport.com.

Here’s what you can expect your APR rate and average loan amount to look like depending on your credit score.

Source: LendingTree user data on closed personal loans for the third quarter of 2023.

3. What are the types of personal loans?

There are two types of personal loans: unsecured and secured. Here’s what you need to know about the major differences between the two:

• Most personal loans are unsecured, meaning you don’t need collateral to qualify and you won’t be risking any personal items or property if you were to miss a payment. Keep in mind that because unsecured loans don’t require collateral, you’ll need to have a high credit score in order to receive a low interest rate. Because of the emphasis on creditworthiness, unsecured loans may also be more difficult to qualify for.
• Secured loans, on the other hand, require collateral. The upside is that you may be able to get a better interest rate or higher borrowing limit because of the collateral you offer. The downside with a secured loan, however, is that if you’re unable to repay it, you’ll lose that collateral. It may be wise to avoid putting anything on the line that you’re not willing to lose.

4. How can I use a personal loan?

You typically need to disclose how you plan to use your personal loan, but most lenders allow you to use a personal loan for a variety of purposes.

However, some lenders require that you use your personal loan for a specific purpose. For example, Happy Money specifically offers personal loans for borrowers to consolidate and refinance their credit card debt.

5. Can I prequalify for a personal loan?

Prequalification, also referred to as a soft credit inquiry, is a way for you to check whether you qualify for a personal loan without impacting your credit. Soft credit pulls also allow you to see what kind of rates and terms you may be eligible for. While many lenders do offer this service, some do not and, instead, you’ll have to submit to a hard credit inquiry to find out whether you qualify. A hard credit pull will impact your credit score, but it can also come with a more concrete loan offer.

Keep in mind when applying for a personal loan that even if a lender does offer prequalification services, in order to be officially accepted as a borrower, you’ll need to submit to a hard credit check at some point later in the process.

6. How much should I borrow?

The amount you’ll be able to borrow depends on the lender and other factors, such as the state in which you live. Just because a lender offers a certain maximum doesn’t mean you’ll qualify for that amount, and it doesn’t mean you should seek that amount. Your request should focus on how much you need.

To figure out how much money you should borrow, analyze the cost of your needs and the room in your budget. For instance, if you’re applying for a personal loan for a home improvement project, add up the various costs you believe you’ll incur and, if you can afford to, you may want to account for any unexpected costs as well. If you need a debt consolidation loan, add up the various debts you’re wanting to roll over and include their interest rates so you can compare them while shopping for a loan. Using a personal loan calculator can help you to evaluate the size of the personal loan you need.

Here are borrowing amounts from a few lenders:

7. What documents do I need to apply for a loan?

After you’ve applied for a personal loan, lenders will typically follow up with you to verify your information. As part of this process, you may have to provide documentation to back up your claims, whether that be in person or online.

To help streamline this process, it is helpful to prepare and gather the appropriate documents and information ahead of time.

8. How long does it take to get a personal loan?

Some lenders provide same-day funding once you’re approved, while others may require three to five business days — or longer — before you get your money. It may also depend on factors including the time of day and day of the week that you accept the loan.

For instance, online lender Lightstream offers same-day funding to borrowers. On the other hand, LendingClub, which is an online personal loan marketplace, takes several days before depositing funds into your account due to its approval process.

Loan funds are commonly disbursed by direct deposit or check. The method you choose will impact the funding time, since waiting for a check to arrive will take longer than an electronic transfer.

9. Where can I apply for a personal loan?

When you’re looking for lenders, one of the best tools for evaluating their trustworthiness and overall quality is customer reviews. These can help you understand potential obstacles (such as customer service or the ease of the application and approval processes) and where the company shines.

However, as with any review, it’s important to keep in mind that many are written by people who have strong opinions about the business or the specific feature they’re reviewing.

While doing your research and shopping around for personal loans, it may be helpful to gather information on multiple lenders and compare their rates, terms, perks and loan amounts. This can help you find a lender that is the best fit for you and may help you save money in the long run.

10. How do I apply for a personal loan?

The personal loan process requires an investment of time and energy to get the best loan for your needs. Not every lender is going to be the best fit for you; your needs and values will help shape your search.

While the application process varies from lender to lender, many creditors typically follow these steps.

Here’s how to start your application for a personal loan:

Check if you prequalify

Many lenders are upfront about whether they offer soft credit pulls so you can avoid impacting your credit when you initially apply for a personal loan. Often, lenders list this service on their website, though in some cases, you may have to contact the lender’s customer service team to find out whether prequalification is an option.

Gather the required documentation

You can help speed the application process along if you prepare ahead of time. Research the lender’s document requirements and prepare to have them available ahead of time.

Fill out the application

Typically, lenders will ask you to fill out an application online, though some may prefer that you visit a local branch. Applications will typically ask for your contact information, income and credit score. They may also ask you how you plan to use the funds and how much you’d like to borrow.

Verify your information with the lender

After you’ve submitted an application, lenders will often contact you to verify your information. You may have to visit the institution in person, but some lenders will do this step remotely. You may have to show a government-issued ID and documents demonstrating your income and proof of residence.

Sign for the loan

Once the verification process is finished, you’ll need to submit to a hard credit inquiry. If the lender doesn’t spot any red flags, they may offer you a personal loan contract, which will outline the terms, rates and conditions of your loan. You’ll need to sign the documents. After that, the lender will send you funds either by direct deposit or check.

11. What are my rights under the Truth in Lending Act?

As a borrower, you are afforded certain federal protections under the the Truth in Lending Act (TILA). This legislation — regulated by the Consumer Financial Protection Bureau (CFPB) — was created to protect potential borrowers when working with lenders, including when it comes to applying for a personal loan.

In particular, TILA requires lenders to be transparent about the APR, fees, loan amounts and payment details when a borrower takes on a form of credit. Lenders are also required to reveal the number of payments the borrower will make under the terms of their loan, the size of the monthly repayments and whether there are any prepayment penalties.

12. What happens if I can’t repay my personal loan?

If you’re unable to repay an unsecured personal loan, lenders may initially charge a late fee. Missed payments are typically reported to credit bureaus after the 30-day mark, a process that can negatively impact your score. If you continue to miss payments, your account may go into collections, which could lead to wage garnishment.

For borrowers with secured loans, missed payments could mean losing your collateral.

Make sure that you can afford your payments before signing for a personal loan; however, we realize that unforeseen circumstances may put a dent in your plans. For those who find themselves in the position of being unable to pay, calling the lender to discuss your situation is always a good idea. That way, you can better understand your options to avoid negative repercussions.

13. What if I get rejected for a personal loan?

If you had your personal loan declined, there may be a couple of potential reasons why:

• Your credit score was too low
• Your income wasn’t high enough
• Your DTI ratio was too high
• You have details on your credit profile that creditors may view in a negative light (for instance: late payments, default accounts or bankruptcy)

If you’re struggling to get a loan because of your creditworthiness, instead of resorting to a predatory lender (such as payday loans), consider these alternatives.

• Consider bad credit loans: While some lenders prefer borrowers with robust credit profiles, there are some lenders that are willing to provide personal loans to those with less-than-perfect credit scores. Lenders that offer bad credit loans typically have much lower minimum credit score requirements. Keep in mind, however, that because you won’t have a dynamite credit score, these lenders may not offer you very low interest rates.
• Bring in a cosigner: When you apply for a personal loan with a cosigner, creditors may view it as less of a risk to lend you money because a second individual is willing to take on the legal responsibility to repay the debt. Not every lender offers this option, however, so you’ll want to do some research to find lenders that allow cosigners.
• Apply for a secured loan: While secured loans do present the unfortunate possibility that you may lose a piece of valuable property if you’re unable to keep up with payments, these types of loans can make it easier for people with lower credit scores to not only qualify for a loan, but to receive a decent APR as well.
• Find a debt counselor: When considering your options, remember that taking out a personal loan may not be the answer to your financial woes. Debt counseling can allow you to find other solutions, such as debt management, consolidation or bankruptcy. Because most debt counseling services are nonprofits, they typically charge little to no fees.

Applying for a personal loan: FAQ

Can you apply for a personal loan without a job?

While you don’t have to have a job to apply for a personal loan, you may have to demonstrate that you receive some type of income that will allow you to repay the loan. For instance, alimony or retirement funds may count as income in the eyes of a lender. You may also apply with a cosigner who has an income.

Does applying for a personal loan hurt your credit?

Applying for a personal loan can temporarily put a dent in your credit score. This is because, in order to provide final approval, most lenders will do a hard credit pull, which can negatively impact your credit score. However, your credit score will eventually bounce back, especially if you make on-time loan payments. You can also use a personal loan to rebuild your credit.

What disqualifies you from getting a personal loan?

Whether you’re approved for a personal loan often depends on your creditworthiness. Aside from your credit score, lenders may also check for things like late payments, a high debt-to-income (DTI) ratio and whether you’ve recently filed for bankruptcy. Other reasons for disqualification may include an unstable income, the amount you asked for was too large or the purpose of your loan didn’t align with the lender’s requirements.

What is the best reason to give when applying for a personal loan?

Since each lender has different criteria when it comes to what they’re willing to fund, this answer can vary. However, whether you need to pay off medical bills or you want to build a pool in your backyard, it’s best to be transparent with the lender about how you plan to use the money, particularly since lenders use this information to evaluate risk and provide you with appropriate rates, terms and amounts.