How to Get Ready for a Personal Loan

How Do You Prepare for a Loan?

Before you start the loan application process, take the following steps to get ready.

1. Decide how much you need. You might have a specific amount in mind, such as the total balances of your high-interest credit cards or the amount of a medical bill. Sometimes you don't know exactly how much you need—for example, if you're financing a home remodel. Get the best estimate you can and consider borrowing 10% to 20% more than you think you need to cover any cost overruns. Some personal loans charge origination fees, usually between 1% and 8% of the amount you're borrowing. Fees are subtracted from the amount borrowed, so if you borrow $5,000 with a 5% origination fee, you'll receive $4,750. If you don't want fees subtracted from the lump sum, you may be able to add them to the amount you borrow; just keep in mind that doing so will increase the cost of the loan.
2. Assess your debt-to-income ratio (DTI). This figure compares your total monthly debt payments with your monthly income. Lenders use your DTI to assess whether you can afford the loan payments. Estimate your own DTI by adding up your ongoing monthly debt payments (rent or mortgage, student loan, auto loan, credit cards and the like) and dividing it by your gross monthly income (before taxes and withholding). A DTI under 36% can help you qualify for better loan terms.
3. Check your credit report. Make sure it's up to date and accurate. Lenders will review your credit history for negative marks such as late payments or accounts in collections.
4. Check your credit score. Personal loans are available to borrowers with fair or poor credit. However, a FICO^® Score^☉ of at least 670 can make it easier to get approved for a personal loan at a lower interest rate, which may mean lower monthly payments.
5. Research lenders. You can get a personal loan from a bank, credit union or online lender. Make sure the lenders you're considering operate in your state and that their minimum and maximum loan amounts fit your requirements.
6. Get prequalified. When you apply for a personal loan, a hard inquiry appears on your credit report, which can negatively affect your credit score. Look for lenders that can prequalify you for a loan by making a soft credit inquiry. This won't impact your credit score.

A mortgage is not a personal loan, but if you are applying for a mortgage, complete the steps above and also apply for preapproval. Mortgage preapproval goes beyond prequalification. You'll receive a document showing that a lender has conditionally approved you for a mortgage up to a certain amount, which can help you buy a house more quickly.

How Do You Plan for Loan Payments?

See if loan payments are affordable by making a budget or reviewing your existing budget to see how much money you have to work with. Next, estimate monthly installment payments for the desired loan.

Use Experian's personal loan calculator to compare various loan amounts, terms and interest rates and get an idea of your payments.

Factors affecting your loan payment include:

• Loan amount: A larger loan means bigger payments, if all else is equal. A $10,000 loan with a three-year term and 11.23% interest rate has a monthly payment of $328.48. Bump the amount to $30,000, and your monthly payment rises to $985.43.
• Loan term: Personal loan terms typically range from a few months to seven years. A longer loan term generally lowers your monthly payments but increases the total cost of borrowing.
• Fees: Some lenders charge an application fee or origination fee. Fees may come out of the lump sum you receive or be rolled into the loan.
• Interest rate: This is the cost of borrowing money, expressed as a percentage of your loan amount. For example, the interest on a $10,000 personal loan at the current average interest rate of 11.23% is $1,825.19 over the life of the loan.

When comparing loans, use the annual percentage rate (APR) instead of the interest rate. The APR incorporates both interest and fees, so it's an apples-to-apples comparison.

Changing any of the factors above can increase or decrease your monthly installment payment. Want a smaller payment? Choose a longer loan term; just be aware this increases the total interest you'll pay. Want to pay less interest? Opt for a shorter loan term, but be prepared for higher monthly payments.

What if You Can't Afford Loan Payments?

You've crunched the numbers and looked for places to cut back, but a monthly loan payment still won't fit into your budget. What can you do?

Get a Balance Transfer Credit Card

Look for a credit card with an introductory 0% APR. If you have good credit, you may qualify for a card that offers this promotion for balance transfers, purchases or both.

These cards let you carry a balance without paying interest until the promotional period—generally 12 to 18 months—ends. Moving high-interest credit card debt to a balance transfer card allows you to pay it off over time without accruing additional interest. There's usually a fee of 3% to 5% of the balance transferred. Be sure you can pay off the balance before the regular APR kicks in.

Get Credit Counseling

If you're struggling with high-interest debt but can't afford a personal loan to pay it off, consider credit counseling. A reputable credit counseling organization can help you develop a plan to pay off debt.

One option is a debt management plan, in which credit counselors negotiate with your creditors, possibly obtaining lower payments. You make a monthly payment to the credit counselor, who pays your creditors. You'll pay a small initial fee and monthly payments while your debt management plan is in place.

Be careful when choosing a debt management plan, as you are counting on the credit counselor to make your payments on time. Look for a nonprofit credit counseling agency affiliated with the National Foundation for Credit Counseling or Financial Counseling Association of America.

They also may not cover every type of debt you have (such as student loans) and, while you're under debt management, you cannot access any new credit.

Tackle the Debt With a Snowball or Avalanche Approach

If you were considering a loan to eliminate debt but can't afford the monthly loan payments, you can pay your debt off slowly without additional credit. Two common approaches to this are the debt snowball and debt avalanche methods. Both are often used to pay off high-interest credit card debt, but they can work for other debts as well.

• Debt snowball: With this approach, you prioritize the smallest debt. Reduce your payments on your other credit cards to the minimum monthly payment and put the cash this frees up toward the account with the smallest balance. Once that debt is paid off, move to the next-smallest debt, and so on. Paying off a small balance quickly can give you a sense of accomplishment, motivating you to keep going.

• Debt avalanche: This approach tackles your most expensive debt first. Shrink the payments on your other credit cards to the monthly minimums and use the extra money to pay down your highest-interest balance. By reducing the growth of interest, the avalanche method can save you more money than the snowball technique. The downside: Chipping away at a big balance can feel overwhelming. If you need faster results to stay motivated, the snowball method might work better.

Save Up for the Expense

You can finance a big future expense, such as remodeling your home, by saving up for it if monthly loan payments are out of your budget. Start a sinking fund by saving a certain amount each month that's earmarked for your goal.

Unlike a loan payment, a sinking fund gives you the flexibility to save more or less each month as your budget allows.

Borrow From Friends or Family

Friends and family may be able to lend you money if you're facing an emergency expense. Your loved ones are likely to be more accommodating than a bank when it comes to payment timelines or interest rates.

To avoid hurting your relationship, only borrow from those who can afford to lend. Draw up a loan agreement that states how you will repay the loan—and stick to it.

What if You Have a Personal Loan and Can't Pay It?

Act fast. Once your loan payment is 30 days late, your account becomes delinquent, and lenders may report it to credit bureaus. A late payment stays on your credit report for up to seven years, which can negatively affect your credit score. You might also have to pay late fees, have your account sent to collections or even face a lawsuit.

If you don't think you can make your next loan payment, reach out to the lender to explain your situation. Your lender may offer one of the following solutions:

• Loan deferment or forbearance are temporary solutions that allow people suffering financial hardship to temporarily pause loan payments. They are typically used for mortgages and student loans, but your lender might be willing to work with you on a personal loan.
• Loan modification adjusts your loan terms to lower your monthly payments. More common with mortgages, loan modification may be an option depending on your lender.

The Bottom Line

Planning ahead before applying for a personal loan helps ensure you can afford the monthly payments. You can find a loan that fits your needs and credit profile with Experian CreditMatch™. Get prequalified by a variety of lenders without affecting your credit score, then compare your loan options and find the best match.