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How to Choose the Best Personal Loan for You
Figuring out how to choose the best personal loan to fit your needs and goals is a process. Each lender has different criteria for an individual’s creditworthiness, so it’s important to do your research to find a lender that’s the best fit for your unique situation. Interest rates and fees vary widely from company to company, making some a better choice than others. Before you apply, there are a few things you can do to determine your eligibility, which can increase your chances of getting approved for a personal loan on the best terms to fit your budget.
How to choose the best personal loan for you
Step 1: Determine how much you need
The first thing to do when choosing a personal loan is to determine how much you need. Personal loans have many uses, including:
- Debt consolidation
- Paying off high-interest loans
- Home improvements or repairs
- Repairing your car in an emergency
- Paying off medical debt
- Expanding your family (adoption, surrogacy, IVF)
- Making large purchases
Once you’ve determined your personal loan needs, it’s time to calculate how much to borrow. If you’re paying off debt, gather all your debt information and write down each amount owed, the interest rate, and whether it’s fixed or variable. When making home repairs/improvements, get a quote (or several) to figure out the amount you need to finance.
[ Read: What is a Personal Loan? ]
Now that you know how to choose a personal loan amount, it’s time to move to the next step in the process.
Step 2: Check your credit score
Checking your credit score is easy and in most instances, free. Your credit score is one of the first things a lender will check to determine if you’re eligible to receive a personal loan. There are three companies that report your creditworthiness: Equifax, Experian and Transunion.
To check your credit score, the first place to look is your bank and credit cards. Most banks and credit card companies allow you to check your credit score for free, as an incentive to bank with them or use their credit cards.
If you haven’t already, log into your accounts to see if you can check your credit score for free. Don’t worry about it affecting your credit; checking your score this way will not change your score, no matter how many times you do it.
Knowing your credit score can give you an idea of your creditworthiness and the range of interest rates you can expect when getting a personal loan offer.
Step 3: Shop for lenders
So far, you’ve determined your personal loan needs and your credit score. It’s time to shop for lenders to figure out which is the best for you.
Many lenders provide information on their websites about personal loan rate ranges and fees. It’s important to compare this information to ensure you know how to choose a personal loan that’s best for you.
When shopping for lenders, be sure to review and compare:
- Loan amounts
- Eligibility requirements
- Fees included
- Interest rate and APR
- If checking your personal loan rate requires a soft or hard credit pull
Once you’ve narrowed down the right personal loan lenders for you, request a quote from each. A soft credit check from a lender won’t affect your credit score, but a hard pull can, so be cautious and know before you submit your information.
[ Next: Comparing Your Many Credit Scores ]
Step 4: Compare APRs and fees
Once you have your personal loan quotes, the next step in learning how to choose a personal loan is comparing the APR and fees. If the APR is the same as the interest rate, there are no other fees included.
While this is ideal, it’s not common. A personal loan may include any of these fees:
- Late payment
- Prepayment penalty
Look for lenders with as few fees as possible. The more fees it has, the more money you may pay. Administration and application fees should be avoided, but late payment fees may be inevitable. If you plan to speed up your payments and pay your loan off early, a lender with a prepayment penalty may not be the right fit.
[ See: APR vs. Interest Rate ]
The higher the APR, the more you will pay over the life of the loan. Remember, when taking out a loan, you don’t just pay back the amount you financed, you also pay “rent” as interest and fees.
As of August 2020, the average interest rate for a 24-month personal loan is 9.34%, which is much lower than the average credit card interest rate at 14.58%. For many, the interest rate and APR will be better on a personal loan compared to using a credit card.
Step 5: Apply for the personal loan
When applying for a personal loan, you’ll go directly to the lender’s website. Be prepared to provide your personal information:
- Full name
- Date of birth
- Social Security number
- Employment information
- Reason for loan and amount desired
- Debt information (if paying off debt)
Applying for a personal loan requires a hard credit check, so it will show on your credit report. At this stage, you should have narrowed your choices down to the top one or two, to avoid multiple credit checks.
Once you choose a personal loan lender, this is the process you can expect when applying for a personal loan:
- Gather all required documents, including personal information.
- Go to the lender’s website and find the application, usually on the homepage.
- Fill out the application in full.
- Receive approval or denial (if denied, you will receive a letter in the mail detailing why your application was denied).
- If approved, receive the loan document and review them thoroughly.
- Sign documents and receive your funds.
With all the work you’ve already done, the application should be the quickest part of the process. The longest part of the process for many is the time it takes to get the money they were approved for.
Step 6: Get approved and sign documents.
Once approved, the next step is getting the amount of money you requested sent to you. Some lenders offer instant approval, so you know right away what you qualify for and the terms.
If you don’t get an instant approval, the lender will provide instructions on how and when you should receive a response. You may find out you weren’t approved, in which case, you’ll get a letter mailed with the reasons why.
The time it takes to receive your personal loan funds varies by lender from the same day to 10 business days. If you’re using the personal loan to pay off credit card debt, some lenders offer the option to transfer directly to them.
If not, then the fastest way to receive the funds is to have it wired to your bank account. To do this, you must provide your routing and account number for your checking or savings account.
[ More: The Best Online Lenders ]
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