How to get a personal loan if you need cash for a big bill or debt consolidation

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To get a personal loan with a decent interest rate, you'll need to have a good credit score.

If you need cash for debt consolidation, home improvement, or any other reason, a personal loan can be a solid financing option.

First, personal loans are typically unsecured, meaning collateral isn't required as it is for other forms of financing, like a home equity loan. And, second, the average interest rate for personal loans is lower than credit cards (another popular form of unsecured debt).

But how do you go about finding and applying for a personal loan? And how do you compare offers to make sure that you're picking the best deal? We'll answer those questions and more in this quick guide to getting a personal loan.

1. Check your credit

As with other forms of financing, your credit score will play an important role in whether or not you qualify for personal loans and the rates that you're offered. According to myFICO, these are the five main credit score ranges:

  • Over 800: Exceptional
  • 740-799: Very Good
  • 670-639: Good
  • 580-669: Fair
  • Under 580: Poor

If your bank or credit card issuer doesn't provide your credit score, you can check it for free using credit score tools like Credit Karma or Credit Sesame. You can also review your full credit report from each credit bureau for free once every 12 months at AnnualCreditReport.com.

If you have a fair or poor credit score (a score of 669 or below), you may want to work to improve your score before applying for a personal loan. Paying your bills on time, decreasing your credit utilization rate, and building a long credit history can all help to increase your score

2. Calculate your debt-to-income ratio

Your credit score isn't the only factor that lenders will consider. They'll usually take your debt-to-income (DTI) ratio into account as well.

Why do lenders care about your DTI? Because if a high percentage of your monthly income is already going towards debt repayment, it may be difficult to handle another loan payment in your budget. 

To calculate your DTI, divide your total debt payments by your monthly income. Let's say, for example, that you have an $800 mortgage payment, a $250 car payment, and a $150 student loan payment each month. That's a total monthly debt obligation of $1,200. 

We'll also say that you have a monthly income of $4,000. In this case, your DTI would be 30% (1,200/4,000 = .30).

So would 30% be a good debt-to-income ratio? Yes. Most banks like for borrowers to have a DTI of 35% or below. You may still be able to qualify for a personal loan with a DTI above 35%, but you're unlikely to qualify for the best rates.

3. Know the various types of personal loans

Once you know your credit and debt-to-income ratio situation, you'll be in a better position to consider which type of personal loan fits you best. Typically, personal loans are:

  • Unsecured, AND
  • For loan amounts over $1,000, AND
  • For repayment terms longer than two years

However, depending on your circumstances and financial needs, you may want to consider a less common type of personal loan. For example, if your application for an unsecured loan is denied, you may still be able to get a secured personal loan. To qualify, you'll need to have a CD, savings account, or other asset that could be used as collateral.

Or you may be looking for a short-term loan of less than $1,000. It's in these types of situations that many people turn to payday loans, which charge massive interest rates. But, as a more affordable alternative, you could apply for a Payday Alternative Loan (PAL) with a credit union. 

With a PAL, you're guaranteed to never be charged more than 28% in interest. To qualify, you'll need to be a member of a credit union for at least one month before applying, the loan amount must be from $200 to $1,000, and the loan term must be from one to six months.

4. See your prequalified offers

Once you've decided which type of personal loan is right for you, it's now time to start getting quotes. Many lenders today can use a soft credit check to give you a prequalified rate quote without affecting your credit score. 

Here's the type of information you may be asked to provide on prequalification forms:

  • Name
  • Date of birth
  • Address
  • Social Security Number
  • Email
  • Phone number
  • Annual income
  • Monthly debt payments
  • Place of employment
  • Highest level of education
  • Purpose of the loan

To save time during this step, you can use a comparison service like Credible. With this type of tool, you can get multiple prequalified quotes without having to fill out a separate application with each lender. 

But don't restrict your shopping to online lenders. Be sure to get quotes from community banks and credit unions, too.

5. Compare loan rates and terms

Now that you've shopped around with multiple lenders, it's time to compare your offers. It's not just as simple as picking the loan with the lowest interest rate. Here are a few other things that you'll want to consider:

  • Fixed vs. variable rates: Some lenders may offer incredibly low rates on their variable-rate loans. But, remember, your interest rate could increase significantly over time. If you can lock in a slightly more expensive fixed-rate loan with a different lender, that may be the better choice.
  • Loan terms: Some lenders only offer repayment terms of five years or less, while other lenders allow borrowers to repay over seven years or even longer.
  • Origination fees: Some lenders charge up to 8% in origination fees, while others charge more modest fees, or none at all.

In addition to origination fees, some lenders may charge prepayment penalties and/or late payment fees. Be sure to do your research and take all of these things into account before choosing a lender.

6. Apply for and close the personal loan

Once you've decided which lender looks right for you, it's time to go fill out the actual loan application. While prequalification will usually only require a soft credit pull, expect the lender to perform a hard credit inquiry when you submit the full application.

Depending on your situation and lender, you could get an immediate application decision. Or the decision could take longer, especially if the lender needs to ask for more information and documents. If you are approved, you'll be asked to sign (or e-sign) the loan documents to close the loan. 

Once the documents have been signed, most lenders promise to send your money within a few business days. But it could take significantly less or more time depending on the complexity of your loan. Some lenders do offer same-day funding. 

Is a personal loan right for you?

Before choosing a personal loan, it's important to consider all of your financing options. For instance, if you could qualify for a 0% intro APR credit card, would that be a better choice? Or, if you're a homeowner, would a home equity loan (or line of credit) be a better fit?

If you do decide that a personal loan is your best option, it's important to be patient during the shopping process. Also, be sure to only borrow what you need and avoid committing to any monthly payment obligation that you can't comfortably repay within your budget.

Credible can help your find the right personal loan for your needs »

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

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