Personal loans can be an incredibly useful tool if you find yourself in a pinch and need to cover a large expense without making a huge dent in your budget all at once.
Unlike a secured loan like an auto loan or mortgage, you aren’t usually expected to provide collateral for a personal loan. Instead, your creditworthiness and financial situation will determine whether or not you’re approved and receive the funds.
The amount of time it takes to get a loan, however, will vary across financial institutions.
What is a personal loan and how does the approval process work?
A personal loan is a type of loan you can apply for and use to pay for a wider range of expenses, rather than a loan that’s designated for a specific purpose like a car or mortgage loan.
You can use a personal loan to cover emergency costs, consolidate existing debt, cover the cost of home improvements, pay for medical bills, and more. While the use cases are slightly different for a personal loan, the application and approval process is pretty standard.
Typically, you’ll submit an application to your lender, either online or in person, that includes basic financial information like your personal details, address, date of birth, income information, credit information, and more.
You’ll also likely provide supporting financial documents at this stage like your driver’s license, Social Security number, passport, tax documents, and bank statements or pay stubs documents as proof of income.
From there, the lender will do some digging to verify that all of the information you’ve provided is accurate. Unless you’ve been prequalified for a personal loan, your lender will conduct a hard inquiry to better understand your financial history.
At this stage, your lender may take days or weeks to review your application and come back to you with a final decision about whether you’ve been approved or not. If approved, you’ll receive a loan offer for your review that clearly outlines the loan terms, such as your repayment timeline, interest rate, loan amount, any origination fee associated with the loan, and more.
Once you’ve signed your loan agreement, you can expect your lender to fund your loan within a few business days. However, many online lenders offer same-day or next-business-day funding.
Factors that can impact your approval timeline
While there’s no exact timeframe for approval and funding, there are factors that can certainly speed up or slow down the loan process.
Prequalification
One way to expedite your loan approval process is to visit your lender’s website and submit a prequalification form if they have one available. Many lenders offer a prequalification tool or estimator that allows you to input some of your basic financial information to determine if you’ll qualify for a personal loan or not.
This will usually result in a soft credit inquiry, but will not impact your credit score in the same way that a hard credit check would.
A prequalification also doesn’t guarantee that you’ll be approved for a loan, but if your lender already has your financial information on file, it could speed up the application process.
You can get a prequalification from more than one lender to compare your loan options and select the loan that would best meet your needs. Once you find the best fit, you’ll need to submit a formal loan application to your chosen lender.
Your loan amount
In many cases, lenders may approve a loan application and disburse your funds within days, especially if you’re applying for a smaller, short-term loan like a payday loan.
However, some lenders may take extra time to review your loan application if you’re applying for a larger loan. Each time your lender approves an application, they’re assuming a certain level of risk that the borrower may not hold up their end of the loan agreement. As such, they may take a bit longer to make a decision about your application, verify your income, and determine whether or not you can afford larger monthly payments and a longer repayment term.
Your lender’s approval process
Different lenders have different processes in place for loan approvals. Some lenders take a little longer to review your materials and process your application. They may also take longer to approve larger loan amounts. In many cases, the type of lender you use can also impact your approval timeline. Online lenders who offer fast and easy online applications may offer faster approval and disbursem*nt times than traditional banks or credit unions.
Incorrect or incomplete info on your application could delay approval
Carefully reviewing the information on your loan application can ensure that your application isn’t held up while your lender verifies the information you’ve provided.
Your lender will ultimately do their own research and independently verify that the information you’ve provided is correct, but they do rely on that initial information to get a sense of where your personal finances are, your debt-to-income ratio, the personal loan rates you may qualify for, and the best personal loan rates for you.
Providing incomplete or inaccurate information can cause your lender to have to circle back to collect additional documents from you, thereby putting your application on hold.
Concerns about your credit history or income
If your income or credit score isn’t quite up to your lender's standards, they may take longer to come to a decision regarding your loan application.
A good credit score and long track record of making on-time payments and managing other debts could make loan lenders more willing to do business with you. However, any derogatory marks on your credit report could make them reluctant to approve your application.
In these instances, you may be asked to provide further documentation to support your application and ensure your lender that you’re in the best position to borrow and repay the amount you’re applying for.
The personal loan application process can be fairly straightforward so long as you have a solid grasp of your financial situation and a clear understanding of how your credit history will play into your lender’s final decision.
The time it takes to process your application and disburse your loan funds can take as little as one business day, or as long as a few weeks, but there are moves you can make to ensure that the loan process is as smooth as possible.
