Two of the biggest factors that impact APR are your credit score and whether the loan is secured or unsecured.
Factor No. 1: Credit Score
Lenders want to be sure that you will repay your loan on time. The lender decides the financial solvency of the borrower by reviewing their credit score.
Your credit score is a three-digit number between 300 and 850. The higher the number, the more confident the lender is that you will repay your loan on time. And the more trust they have in you, the more likely they are to offer you a good interest rate.
Your credit score can go up or down depending on how you manage your finances. If you have a low credit score today, you can gradually raise it by paying your debts on time and in full. If your score is low, personal loans can be a great way to build your credit and help you get lower interest rates in the future. But make sure you choose a lender that won’t take advantage of your low score and therefore offer you a triple-digit APR.
You can get a loan from banks, credit unions, or state-licensed lenders. Most banks and credit unions will not approve personal loan applications if there is no credit score. This leaves many people with limited options, and most of these options offer extremely high APRs.
If you don’t have a credit score, look for lenders that don’t require it to apply, like Oportun. These lenders understand that your credit score is just one piece of the puzzle and will take other information into account when processing your application.
Factor No. 2: Secured or Unsecured Loans
Your APR is also affected by the type of loan you take out.
A secured personal loan requires you to put up collateral. This collateral can be your house, your car, or something else of value that you have. If you don’t make your loan payments on time, your lender can take this collateral and apply it to your payments. The guarantee reduces the risk for the lender and gives you an additional incentive to make your payments. As a result, a secured personal loan has a lower interest rate than an unsecured personal loan.
Most personal loans are unsecured. Unsecured personal loans do not need collateral. They allow you to borrow money without putting your belongings at risk. However, unsecured personal loans are generally more difficult to qualify for than secured personal loans.
How to apply for a personal loan?
Applying for a personal loan is easy. Just follow these steps:
1. Check your credit score
Before applying for a personal loan, check that your credit score is accurate. Everyone has the right to check their credit score for free once a year with the three major credit bureaus: Equifax, TransUnion, and Experian.
If you discover that your credit score is wrong or contains errors, you must notify the credit bureau as soon as possible to correct it.
2. Gather the necessary documents
Your credit report (if you have one) isn’t the only thing the lender wants to review. You need to gather all these documents:
- Valid photo ID (driver’s license, passport, ID card, or non-US ID card)
- Proof of income (pay stub or current bank statement)
- Proof of address, such as a mailing envelope with your name and address on it
- Four or more personal references (from friends, family members, or employers)
3. Find a lender
The next step is to find a lender (bank, credit union, or state-licensed lender). Dozens of lenders can offer you a personal loan, but not all lenders take your interests into account. Ask them a few questions before you decide who you want to work with. Ask them, for example:
- What are the APR percentages for your personal loans?
- Is there a loan origination fee or prepayment penalty?
- How fast do you process applications?
- What are the terms of the loan?
- Is a credit score required?
- What is the maximum amount of a loan?
- Do you offer secured and unsecured loans?
4. See if you prequalified
Before officially applying for a loan, it is common to apply for prequalification. This lets you know how much money you are likely to qualify for. You can fill out the prequalification application online in a few minutes. The lender will ask for your contact information, the loan amount you want, your employment status, and your income. Some lenders will request a “ soft inquiry ” of your credit, which allows them to see your credit score (without affecting your credit score).
This review takes a few minutes. Once completed, the lender will decide whether or not to prequalify you. If you prequalify, it will present you with an estimate of the loan it offers you. If you prequalified for multiple loans from different lenders, you can compare the estimated terms and APRs.
You must take into account that prequalification does not necessarily mean that you are already approved for the loan. For that, you need to fill out the formal application.
5. Finish filling out your application
Once you’re pre-qualified, it’s time to finish your application. Lenders may request additional documentation to confirm your personal information, financial history, and employment status.
At this point, the lender will conduct a ” hard inquiry ” of your credit report. An incident inquiry allows your lender to see your entire credit history. Your credit report will show that you applied for a new credit product. This can temporarily lower your credit score number. This means that, if you apply with several lenders, try to complete your applications within a few days of each other, as regularly doing this minimizes the impact on your credit score.
Once you have submitted your application, the lender will review it. Some lenders notify you of the result in a few hours and others may take a few days.
6. Sign the agreement
After you’ve been approved, all you have to do is review and sign your contract. When reviewing your contract, be sure to ask your lender questions that come to mind. Once you sign up, you will receive the money pretty quickly, usually within 24 hours.
7. Make scheduled payments
You are responsible for making regular payments on time and in full. This will help you avoid costly fees and build your credit history.
