A personal loan can assist you in making a large purchase, paying off debt more quickly, covering an unforeseen expense, or getting over a financial rough patch. The majority of personal loans are unsecured and easily accessible through banks, credit unions, and online lenders.
Personal loans come in a variety of forms, including debt consolidation loans, home renovation loans, medical loans, and wedding loans. But you should be aware that there are several steps in the application procedure before you submit your application. It’s advantageous to become familiar with those procedures so you’ll know what to anticipate and prevent any surprises.
What is a Personal Loan?
A personal loan is money you borrow for almost any reason, such as college loans, unexpected medical expenses, new appliances, vacations, or debt consolidation. Over a period of time, typically between two and five years, you pay the money back in monthly installments, interest included. Most personal loans are unsecured, which means they are not supported by assets.
An annual percentage rate is used to indicate the interest you pay (APR). As of May 2022, the average APR for personal loans is 8.73 percent, but it can vary from 6 percent to 36 percent based on your creditworthiness, which is determined by looking at your income, debts, and credit score. Personal loans can be obtained from a bank, credit union, credit card company, or internet money lender.
How to Apply for Personal Loan and Get Approval: Step-by-step Guide
- Apply online
- Maintain a good credit score
- Check your credit score before applying
- Keep a good bank balance
- Apply with only one lender
- Keep all the documents ready
- Provide accurate information
- Apply for what you can manage to pay
Step 1: Apply online
The quickest and most secure way to obtain a personal loan is to apply online. After submitting your application with all the necessary details and supporting documentation, the lender will send you a confirmation message. The lender will decide whether to approve or deny the loan application after reviewing your profile and supporting papers.
Additionally, receiving all loan application updates via emails and/or text messages is a big plus. After you have completed all the necessary documentation, the loan approval process normally takes one week. The disbursement may take an additional one to two days after approval.
Step 2: Maintain a good credit score
The value of your credit score reflects your creditworthiness. A credit score of at least 750 will help speed up the approval process for a personal loan, though generally speaking, a score over 700 is good.
As a result, a solid credit score is required to get your personal loan accepted. This is the most crucial factor that lenders take into account when assessing your profile, particularly when considering a personal loan because it is an unsecured loan and does not need any form of security.
The main variables taken into account when authorizing the loan are hence your income and credit repayment history. If you have a high credit score, lenders will view you as having a low risk profile, meaning there is less chance that you will ever fail on a loan.
This helps you obtain a higher interest rate and lower processing costs, as well as increases the likelihood that your personal loan will be granted fast.
You should always pay your credit card and loan obligations on time if you want to increase or maintain your credit score. Setting up a standing bank instruction for all of your EMIs to be paid automatically is the best course of action.
It guarantees that on the due date, your EMI will be immediately deducted from the bank account you have on file. Maintain a sufficient balance in your auto-pay registered bank account at all times to prevent your standing instruction from bouncing.
Step 3: Check your credit score before applying
It is recommended that you check your credit score before applying for a personal loan, even when you are aware that you have an excellent credit history and have never failed on any loans. You could have forgotten to make a few credit card payments on time and made them a day or two later.
Multiple credit card bills can be difficult to track. Despite being unintentional, these payment delays might lower your credit score. Additionally, a credit score may contain inaccuracies or mistakes that cause a loan to be declined. Knowing your credit score in advance can help you raise it before you apply for a loan.
Additionally, it’s important to examine your credit score because different lenders have varying standards for credit scores. Your credit score may be impacted negatively if your loan application is denied. As a result, it is a good idea to examine your credit score to see if it satisfies the lender’s requirements for credit scores.
Step 4: Keep a good bank balance
Lenders look at your average monthly balance as well as your ability to pay back the loan. The average monthly balance is calculated by adding together all of the daily closing balances for the days in the month and dividing that total by the number of days in the month.
Therefore, banks and NBFCs will consider lending to you if you keep an overall good balance because it demonstrates that you have a strong ability to repay the loan.
Additionally, if you keep a larger average amount in your savings account, banks will offer instant personal loans, pre-approved personal loans, and pre-qualified personal loans that are absolutely frictionless and hassle-free.
These personal loans are prepared for disbursement and can be credited to your savings account with only a few clicks. However, we urge you to study the terms and conditions, be aware of the various fees, compare them with other lenders, and then make an informed decision rather than becoming enthralled by an immediate loan and blindly applying for it.
Step 5: Apply with only one lender
In order to enhance their chances of receiving a loan as soon as possible, consumers frequently apply for personal loans with several banks and NBFCs when they are in urgent need of cash. The fact that you have applied to multiple lenders, nevertheless, may give the lenders the impression that you are in need of money and are scrambling to get a personal loan.
It is likely that the lenders will decide not to offer you a credit facility in such a situation. Furthermore, making numerous loan applications may lead to numerous denials, which could harm your credit score. Additionally, applying at various banks and NBFCs can be time-consuming. As a result, keep track of all of your applications and work with various lenders.
The requirements for lending vary depending on the lender. Although they all provide the same product—a personal loan—the features, advantages, rates of interest, and other fees might range significantly.
Therefore, you should do your homework and choose the lender after examining their eligibility requirements and product characteristics before applying straight for a personal loan with any lender.
Step 6: Keep all the documents ready
Before submitting an application for a personal loan, be sure you have all the necessary paperwork on hand. Lenders do not typically want a lot of paperwork because the loan is unsecured. The list of required documents is available on the lender’s official website, or you may ask a bank representative for it.
You can speed up the loan procedure by having all the necessary paperwork on available. The following documents are often required by lenders:
- Identity proof – PAN Card, AADHAR Card, passport, etc.
- Address proof – AADHAR Card, Voter ID, passport, electricity bill, etc.
- Income proof – For self-employed candidates, the last two years’ worth of balance sheets and profit and loss statements, certified by a Chartered Accountant (CA), and the last three to six months’ worth of pay stubs for salaried applicants.
Step 7: Provide accurate information
Giving precise information about your income and personal circumstances will not only improve your chances of getting a loan but also streamline and simplify the procedure overall.
For instance, if you have more than one source of income, list them all at once so the lender won’t need to contact you later for extra income-related papers if your primary source of income isn’t enough to cover the cost of the loan.
Additionally, if you are renting a place, you must present confirmation of your permanent address as well as your rental agreement.
Step 8: Apply for what you can manage to pay
A loan application will be denied if you request a credit limit that is larger than what you are able to repay. Since there is no requirement for security with a personal loan, you should just think about your sources of income and only apply for an amount that you can comfortably afford to return.
You should take into account all of your fixed and variable expenses, the potential for any increases in expenses, as well as your current debts when determining your ability to repay credit.
When applying for a personal loan, take your debt-to-income ratio into account as well. Your monthly EMIs to your monthly income are divided by three to get your debt-to-income ratio. A healthy debt-to-income ratio is one where your monthly payments equal less than 30% of your income.
The higher the ratio, the greater the likelihood that a loan application would be denied. A larger ratio indicates that your liabilities exceed your income. Your debt-to-income ratio, for instance, would be 60 percent if your monthly wage was Rs 50,000 and your current EMIs were Rs 30,000. If a debt-to-income ratio exceeds 45 percent, lenders typically view the situation as dangerous.
How to Apply for a Personal Loan Online
- Visit the lending company’s website.
- Select personal loans from the loan area.
- Select “apply now” by clicking.
- Fill out the application for a personal loan with the information, then send it to the bank.
- The bank will determine whether the applicant is qualified and will ask for the provision of the necessary income and KYC documentation.
- The bank will transfer the loan amount to the applicant’s bank account specified in the application form if the applicant is determined to be qualified.
An emergency or tight financial situation, personal loans might be helpful. They don’t need any collateral and can be obtained with the least amount of paperwork. Personal loan approval does seem like child’s play these days with so many banks and NBFCs aggressively pushing rapid personal loans.
Financial institutions may not make clear all of the qualifying requirements, terms, and conditions when you apply, and this can sometimes cause the loan application process to be delayed.
It is essential to avoid any potential delays by following this advice because so many people apply for personal loans when they urgently need money
How to Apply for a Personal Loan from a Bank
If you’ve never applied for a personal loan before, the process may seem intimidating. You can follow these five steps to complete the process.
Check whether you qualify for a bank loan
You should ascertain your eligibility before submitting an application for a bank loan. Although some banks accept applicants with fair credit (690 or higher on the FICO scale), most banks demand that applicants have good to excellent credit (690 or higher on the FICO scale) (630 to 689 FICO).
A common cap for DTI is 40%, but lower is preferable. Banks may also look at your debt-to-income ratio to determine whether you have enough cash flow to take on new debt.
Setting up a pre-qualification with the bank is one of the finest ways to confirm your eligibility. Pre-qualifying is the process of filling out a brief application to determine your potential rate, loan amount, and payback period. Your credit score won’t be impacted by pre-qualification.
This choice is not provided by all banks, though. If your bank doesn’t, phone customer care and inquire about the requirements. Collect minimum income or credit score criteria if available.
If you want to apply for a personal loan with some banks, you may need to be a current client, be invited to apply, or have a checking account active for a particular period of time.
Compare rates on bank loans
To make sure the loan you select best meets your needs, you should examine loans from other lenders even if you already have a bank in mind.
The most accurate way to compare a loan’s cost is to use the annual percentage rate, which takes into account both interest and any other costs. Finding the lowest APR might result in substantial savings as bank loan APRs typically range from 6 percent to 25 percent.
If one bank, for instance, offers a $20,000, four-year loan at a 10% APR, you’ll pay $4,348 in interest in addition to $507 in monthly payments. However, if you take out the same loan from a different lender at an APR of 8%, you’ll have to pay $3,436 in interest as well as $488 in monthly installments.
On their websites, several banks display the ranges of their APRs.
Pre-qualifying with a few internet lenders may also be a good idea. With a soft credit check, almost all online lenders will present you with customized rates and terms, giving you more options to think about without jeopardizing your credit score.
The payback period and monthly payment that best suits your budget should also be considered while you compare rates. The smaller your monthly payment, but the more interest you’ll pay, the longer your payback term.
Submit your application for a bank loan
It’s time to apply when you’ve verified your eligibility, evaluated prices, and decided on the best choice.
Although many applications are submitted online, some banks, particularly community banks or institutions that offer larger loans, may require you to submit them in person.
Depending on the bank, the application itself may vary, but you’ll probably need to provide:
- Information about yourself, such as your name, address, phone number, and birth date.
- Loan information, such as intended loan amount, loan purpose, and the repayment period.
- Personal identification number.
- Evidence of income and employment.
- Details regarding existing indebtedness.
- Information on monthly bills, including rent or mortgage payments.
A rigorous credit check will be performed once you complete the application, temporarily lowering your credit score by a few points. Depending on the bank, you might find out within minutes if you’re approved or not, while other banks might take a few days.
Review the loan agreement
You’ll get the loan agreement if you’re given the go-ahead for the loan. While some banks demand that you sign the contract in person, others will let you sign electronically.
It is important to thoroughly study the loan agreement to ensure that the loan amount, payback period, APR, and monthly payment amount are accurate.
Pay particular attention to all costs, including those for late payments. Even though it’s uncommon, if you pay off the loan early, some banks could impose a prepayment penalty.
Receive your funds
Even though some banks offer next-day funding after you’re authorized, you should receive the money in a lump sum within a week of signing the loan agreement. The money can be sent to you as a cheque or it can be directly deposited into your personal bank account.
Make a strategy to pay back your loan as soon as you receive the money. Most banks provide the option of automatic payments, which may help you avoid late fees. Some banks may even lower your rate if you choose to enroll in an autopsy.
Before you apply for that loan, learn about Personal Finance Planning Process.
How to Apply for a Personal Loan with Bad Credit
Borrowers with bad credit (a FICO score of 629 or lower) might have to put in more effort to qualify, but doing so can speed up the approval process and possibly result in a reduced interest rate.
Following these steps, applicants with bad credit can submit an application for a personal loan:
Check your credit
In most cases, lenders have minimum credit score criteria, and you risk being turned down if you don’t fulfill them. NerdWallet is one of many financial organizations that give free credit scores, and annualcreditreport.com provides a free, comprehensive analysis of your credit history. On your report, there could be mistakes that, once fixed, would improve your credit.
Compare lenders
It pays to compare several possibilities because no two lenders have the same borrower specifications or rates. The top lenders for those with bad credit give you a rate you can pay for along with other useful features like tools for establishing credit, quick funding, or a mobile app to track loan payments.
Pre-qualify
Pre-qualification does not lower your credit score; it merely informs you of the rate, loan size, and repayment period you might anticipate. It’s especially helpful if you want to compare offers and are attempting to figure out whether you qualify for a loan. This feature is provided by most banks and online lenders.
Add to your application
You may be able to qualify for or receive a better rate on a personal loan with co-signed and secured loans. With a co-signed personal loan, the application also includes the credit and income details of another individual who promises to repay the loan in the event that the borrower is unable to.
Secured loans allow you to put up security, usually in the form of a car or savings account, which the lender may take if the loan is not repaid.
Apply
To hasten the loan application procedure, it helps to gather the necessary paperwork in advance. These may contain your Social Security number, W-2s, salary stubs, and bank records. Though most lenders make decisions within a few days, certain lenders will respond to your application the same day or the following day.
How to Apply for a Loan with no Credit
Consider a scenario in which you find yourself in need of a personal loan but have no credit. Although difficult, it is possible to be approved for emergency loans without a credit score. It pays to know your alternatives if you want to obtain a loan without credit.
The following alternatives describe how to obtain a loan without credit:
Online lenders
Some online lenders consider other factors when making loans to those with bad credit. They may consider your college’s location, major, and grade point average.
Banks and credit unions
You might be surprised to learn that your local bank or credit union can help you obtain a loan even if your credit history is virtually nonexistent.
If you have an existing relationship, a bank or credit union can quickly access your account to check things like how frequently you deposit money, if you consistently spend more money than you bring in, and how responsibly you manage your account overall.
Cosigner
Your chances of getting a loan are increased if you have a cosigner with a good credit score. Additionally, it makes it more likely that you’ll receive favorable repayment conditions and a low-interest rate. Additionally, making on-time monthly payments enables you to establish a solid credit history.
Only apply for a loan with a cosigner if you are confident in your ability to repay it; otherwise, your cosigner’s credit will suffer.
Collateral (secured loans)
Secured and unsecured personal loans are the two available varieties. In the event that you are unable to repay the loan, you agree to provide the lender with an asset. “Pleading collateral” is the term for this.
If you are able to supply collateral, it is typically simpler to be approved for personal loans without credit.
A retirement account, a car, a savings account, or jewelry are just a few examples of valuable collateral.
Paycheck advances
Paycheck advances are provided by some employers. These are loans that will be repaid by withholding money from upcoming paychecks. These programs are frequently administered by external lending institutions and provide all employees with the same interest rates and conditions, regardless of their credit ratings.
A paycheck advance from your employer may be advantageous to you if you need a loan but have no credit in two ways:
- You will receive the loan you require when you require it.
- Your credit score may rise as a result.
Make sure you are aware of the fees and interest costs associated with any loans before you apply for one. Additionally, find out the terms of repayment and confirm that you can afford the monthly payroll deduction.
Personal loans for bad credit
It’s not the same as having a poor credit score if your credit score is minimal or nonexistent. However, lenders that are ready to take a chance on borrowers who have no credit and need a loan are sometimes the same lenders who take a chance on borrowers with bad credit.
Your ability to make complete, on-time payments that will improve your credit score is provided by personal loans for bad credit. Simply keep an eye on the interest rates because they might be quite high for these loans.
Credit-builder loans
You might wish to consider a credit-builder loan if you need to get a loan with no credit. Apply for and get granted a small loan with a credit-builder loan. You pay back the loan, along with interest, and the credit bureaus are informed of your payments. Also, you can only access the loaned funds if all of the payments have been made.
If you want to improve your credit, a credit-builder loan is an excellent choice. If you require money straight soon, it is not a good solution.
Family and friends
Your loved ones will be aware that you won’t be able to secure a loan on your own if you have no credit, so they will be happy to help. If it has taken you a while to establish a credit history, they will understand. When faced with a crisis, turn to individuals who care about you for assistance.
If they agree to lend you money, handle it just like any other loan. Create an agreement with an outline:
- Amount of loans you have
- When will you make payments?
- What the payment amount will be
- Date of full repayment of the loan
How to get Approved for a Personal Loan
There is no way to ensure that a lender will accept your loan application, but the following advice will improve your chances:
Check your credit score
Examine your credit report briefly before submitting an application. Credit Sesame has it available without charge. Before applying for a personal loan, submit a dispute if you identify an inaccuracy.
If your credit score is less than 600 and your credit report is reliable, don’t be concerned. It doesn’t imply you won’t be approved for a loan. Your interest rate, however, can be greater to assist the lender in hedging against the risk of default. And in other cases, a secured loan may be the only option for you. It could be smart to raise your credit score before applying, therefore.
Shop around for lenders
Making the mistake of working with the first lender who mails you a letter could be disastrous. See who offers the best deals by shopping around.
Before you apply for a loan, be sure you meet the lender’s requirements to avoid having your credit impacted repeatedly. In order to help you assess your pre-qualification without performing a hard draw on your credit, several lenders also provide screening tools on their websites.
Submit the application
Contact the lenders you believe might be a good fit. Make sure to contrast at least three lenders’ offerings. Make care you fill out the form completely and send any supporting materials the lender requests. If not, the lender can deny your request.
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Where to Apply for Personal Loan
With nearly 20 million new loan originations this year, the demand for personal loans is anticipated to reach or surpass pre-pandemic levels. The demand for personal loans has been steadily increasing over the past 12 months. More borrowers are resorting to personal loans as a method to consolidate their rising credit card debt.
Banks, credit unions, and online-only lenders are the three primary categories of lenders to consider when looking for a personal loan.
Online lenders
By letting you compare personal loan rates and terms, apply online, and typically get a response the same day, these digital lending companies speed up the borrowing process. Additionally, the loan proceeds may be deposited into your account as soon as one or two business days.
Most online lenders use a prequalification process, which is one aspect that sets them apart. Following a “soft” credit check that has no effect on your credit, online lenders can offer you individualized rates and terms. But before you sign the loan documents, the lender will run a “hard” credit check, which often temporarily reduces your credit ratings by a few points.
Even those with weaker credit scores can get loans from online lenders. They might take into account your work and education in addition to your credit history and income when deciding whether to lend you money.
There are numerous online lenders from which to pick. For instance, you might choose to operate online with a peer-to-peer lender. Instead of a regular bank, investors fund these loans.
Advantages
Fees could be lower, and the lending procedure is typically more convenient and seamless. Since operating a physical facility is not an expense for online lenders, account holders benefit from the savings.
Disadvantages
Potentially increased interest rates. Online lenders may demand higher interest rates than conventional banking institutions since issuing unsecured personal loans is hazardous. If you’d prefer to talk to a loan officer face-to-face, you also won’t have access to a physical branch.
Best for
Borrowers are comfortable applying for a loan without speaking to a real lender and are tech-savvy.
Banks
Brick-and-mortar banks continue to make tens of billions of dollars in annual personal loan lending even if online lenders are now a larger part of the market. Banks often give larger loan amounts but demand that applicants have better credit ratings.
If you already have a relationship with a bank, some of them provide discounts. For instance, if you already have a qualifying account with the bank, some banks may knock 0.25 percent off the APR of your personal loan. Over the course of the loan, this could enable you to save money. Ask for this kind of discount if you enjoy your bank or have been a customer for a while.
Even if you’ve had a long relationship with a particular organization for banking, it will nonetheless run a credit check. Before deciding whether to lend you money, the bank will run a rigorous credit check and look over your personal data.
Advantages
In general, conventional banks offer larger loan amounts. If you require a sizable loan, this may be helpful. If you have an active account, you might furthermore be eligible for a discount.
Disadvantages
For acceptance, traditional banks may have higher screening standards and frequently require a high credit score. You might also need to submit your loan application in person at a nearby branch.
Best for
Good credit borrowers
Credit unions
Credit unions are supposed to behave in the best interest of their members, who are clients like you, as opposed to reporting to shareholders. To be eligible for a personal loan from a credit union, you must be a member, but this requirement could be simple to meet. Some credit unions, for instance, only demand that you live in a specific area or give a small payment to a charity.
Average credit borrowers may have better luck obtaining a personal loan from a credit union, particularly one with which they already have a working relationship.
Being nonprofit organizations, credit unions may be influenced in their lending decisions by their mission. For instance, the Navy Federal Credit Union, which offers loans to members of the U.S. armed forces and the National Guard, may approve borrowers for loans that would not otherwise be accepted.
In comparison to banks and online lenders, credit unions frequently provide smaller personal loans, often at a lower interest rate. The National Credit Union Administration reported in March 2022 that the average interest rate for a three-year personal loan at a credit union is 8.77 percent, compared to 9.85 percent at a bank.
The National Credit Union Administration establishes the maximum interest rate federal credit unions may charge for loans, which is presently fixed at 18%. But for short-term loans, the top interest rate goes up to 28%.
Advantages
If you have a good working relationship with the institution, credit unions may approve you for a loan despite their normally lax credit score standards.
Disadvantages
Because credit unions take on more credit risk than banks do, loan levels are lower. In order to be eligible for a loan, you must also be a credit union member.
Best for
Those credit union members who have fair credit and don’t require a significant loan.
Documents Needed for Personal Loan Application
Your lender will ask for a number of documents when you are ready to legally apply for a personal loan to verify information such as your name, address, and employment. As part of the personal loan application procedure, lenders typically demand the following papers.
Loan application
In order to start the lending process, lenders ask potential borrowers to fill out and submit a formal loan application. The particular requirements may change because each lender uses a different program. In general, however, you’ll have to give some basic information about yourself as well as the amount and reason for the loan.
Each lender may have a different loan application format. While many online lenders provide a fully online application process, other lenders might need to speak with you about your application over the phone before making a decision. A few physical banks and financial organizations also demand that candidates submit paper applications in person.
Proof of identity
Most lenders demand that applicants show at least two pieces of government-issued identification to demonstrate that they are at least 18 years old and are citizens of the United States. The risk of identity theft is decreased by this precaution. The following are often recognized types of government-issued identification:
- Driver’s license
- Other state-issued ID
- Passport
- Certificate of citizenship
- Birth certificate
- Military ID
Employer and Income Verification
Lenders want to know that you have the resources to repay both your previous loans and the new ones. To do this, lenders often request that as part of the application process, prospective borrowers provide proof of their employment history and present income. For traditional employment, common methods of proving income are as follows:
- Paystubs
- returns
- W-2s and 1099s
- Bank statements
- Employer contact information
Prospective borrowers who are self-employed must instead rely on bank statements, 1099 forms, and income tax returns.
Proof of address
Most lenders want to know that you have secure living conditions in addition to verifying your work. In order to do this, you may need to present evidence of your address, such as a current utility bill, a copy of your lease or other rental agreement, your voter registration card, or documentation of your home, renter’s, or auto insurance that includes your address.
Conclusion
Even if applying for a personal loan might not be as simple as it first appears, using the advice above will speed up the approval process.
We recognize that obtaining a personal loan is typically a pressing need, but we don’t recommend doing it right away. Instead, do your homework and submit an application to the lender whose qualifications and needs you most closely match.
Additionally, read all the terms, conditions, and fees in advance to avoid any unpleasant surprises. These fees include processing fees, pre-payment fees, and foreclosure fees.
See also: How to Get Personal loans with Good Credit Score
FAQs
How do personal loans work?
Personal loans are one-time sums of money given to you by a bank, credit union, or online lender. Then, over a defined length of time, you repay the loan in monthly payments together with interest charges. Personal loans, as opposed to other loans for a particular kind of purchase, such as a home or auto loan, can be utilized for nearly any reason.
How do you apply for a personal loan?
- Apply online
- Maintain a good credit score
- Check your credit score before applying
- Keep a good bank balance
- Apply with only one lender
- Keep all the documents ready
- Provide accurate information
- Apply for what you can manage to pay
Can I apply for a personal loan online?
In the age of the internet, many financial organizations now offer Personal Loans exclusively online. For the purpose of submitting paperwork and applying for a loan, applicants are not required to go to the lender’s office. However, the documentation requirements for various lenders vary.
How can I get a loan urgently?
Whenever you require cash for pressing personal requirements, you can apply for a loan from the comfort of your home. There is no need to hold up on receiving a loan approval for several days. Your information will be processed quickly by the lender, and you might be approved for an urgent loan that very same day.
References
- https://www.investopedia.com
- https://www.personalfn.com
- https://www.bankbazaar.com
- https://www.nerdwallet.com
- https://www.supermoney.com
- https://www.bankrate.com
- https://www.forbes.com
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