Personal loans are one of the most versatile financial products available. Most personal loans allow you to do whatever you wish with the funds, from remodeling rooms in your home, to consolidating debt or paying off an old business loan. That said, an experienced loan officer may ask you how you intend to use the funds in order to help you choose the right loan type.
The short and sweet answer
Applying for a personal loan is like starting a new relationship. You should answer every question posed (whether it comes directly from a loan officer or via an online questionnaire) as thoroughly as possible. As the loan applicant, you owe it to a potential lender to give them a complete picture of your financial situation. Besides, if you forget to disclose information or they find out you've been dishonest, they're unlikely to approve your loan. No one wins in that situation.
The lender's perspective
From the moment you fill out a loan application, a lender is invested in learning everything they can about you. That's because things like your credit score and debt-to-income (DTI) ratio give them a sense of how well you have managed debt in the past and how much debt you currently carry in relation to your income. These are things they learn by ordering a copy of your credit report.
They will also want to know where you work, how long you've been there, and how much you earn. These are answers you provide. And whether you're borrowing money from a bank, credit union, or online lender, you may be asked about the loan's purpose. Your answer does not necessarily impact your odds of loan approval, but as mentioned, a good loan officer can help steer you toward the loan option that best meets your needs.
For example, some lenders specialize in debt consolidation and can help you understand how a debt consolidation loan works. It makes sense that a lender would want to know that the funds you borrow to pay off existing debt are used to pay the debt (some lenders will even pay the old debt off for you).
In addition, if your loan needs to be secured with some kind of collateral, your lender will want to know more about what it is you're offering up as security. If that's a car or a financial instrument like a certificate of deposit (CD), you'll need to provide information to your lender that allows them to evaluate the collateral's value.
Your perspective as the borrower
It's all about the bottom line for the prospective borrower. Once you decide to borrow money -- for any reason -- you focus on finding the ideal loan for you. In addition to a loan payment you can easily manage, you want a personal loan with:
- A good interest rate
- No origination fee
- Reasonable closing costs
To land the best loan, you apply with several lenders. And because the best personal loan lenders do not run a hard credit check until you decide to borrow money from them, you don't have to worry about a ding to your credit score. Instead, you fill out an application, and they run a "soft" credit check that provides a snapshot of your credit history -- just enough for them to know if they would like to make a loan offer.
Once you've gathered a few loan offers, compare them to each other. This is what you're looking for:
- Which lender has the lower interest rate? Even half an annual percentage rate makes a difference in your monthly payment as well as the amount of interest you'll pay over the life of the loan.
- Which financial institution charges the lowest lender fees? It's never a good idea to pay more fees than necessary.
- Do any of the lenders charge a prepayment penalty? If you hope to pay your loan off early, there's no reason to work with a lender who will charge you for the privilege.
- Which lender offers a loan term that works with your budget? The faster you can pay a loan off in full, the less interest you'll pay. Still, you need the repayment term on a personal loan to be long enough to make the monthly payment easy to afford.
- What are the loan amounts offered by each lender? Any lender who offers to lend you the amount you requested should be a serious contender, provided they offer a low interest rate, low (or zero) fees, and no prepayment penalty.
Once you decide on a lender, the rest is easy. That lender will run a hard credit check. They may also request additional documentation like a tax return. Finally, they may have other questions for you. Your only job is to provide them with the answers they need.
FAQs
Yes, definitely disclose the purpose of your loan right away. Not only does this help give your lender some idea of what you plan to do with the money, they can sometimes get a better understanding of how you're handling your finances. For example, a lender might have different requirements for a borrower with a lot of debt who was wanting to consolidate that debt, than they would a similarly indebted borrower who was trying to finance a vacation.
Although you don't have to disclose payments like alimony or child support, these can be disclosed at your discretion. They may help improve your chances of getting the loan, since they generally count as income for lending purposes. Just be sure you can provide documentation from the court, in case it's needed.
Our Loans Experts
By:Dana George
Writer
Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
By:Kristi Waterworth
Kristi Waterworth has been a writer since 1995, when words were on paper and card catalogs were cool. She's owned and operated a number of small businesses and developed expertise in digital (and paper) marketing, personal finance, and a hundred other things SMB owners have to know to survive. When she's not banging the keys, Kristi hangs out in her kitchen with her dogs, dropping cheese randomly on the floor.
Fact CheckedAshley Maready
Writer and Editor
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
