Your guide to applying for a personal loan

"Life is what happens to us when we're making other plans."

We've all heard some version of that famous statement, the meaning of which is simple: Stuff happens.

In the world of personal finance, we can be disciplined about maintaining our budget, our spending habits, building our savings and tracking our investments. And there's always a chance that something could happen — something expensive enough that we need an assist to help keep our current finances and our financial futures safe.

In these instances, when an emergency fund isn't available or won't suffice, a personal loan might be the solution.

What's a personal loan?

A personal loan is money you borrow from either a bank or other financial institution, such as a credit union, or from a private lending company. Many times, people pursue these loans to cover unexpected expenses that they would struggle to afford on their own. Other times, it's used for more fun items like improvements to a home. Anyone want a pool?

In short, the lender agrees to provide the money and the borrower agrees to pay it back, with interest, through installments over the life of the loan.

Annual percentage rates (APRs) on personal loans — the interest rate the borrower pays in addition to the principal amount of the loan — can vary based on market conditions and the borrower's creditworthiness as determined by the lender.

A borrower with a poor credit score, for example, may be seen as a bigger risk in the lender's eyes and be given a higher APR as a result. A borrower with excellent credit may receive a lower interest rate. Each lender has its own criteria for determining how to assign interest rates. A credit score may be just one of many factors.

Understanding loan terms

Personal loans can be unsecured or secured.

An unsecured loan means there's no collateral attached to them that may be taken by the lender if the borrower is unable to make payments. These are riskier loans for the lender, so APRs might be higher, along with the qualifications to apply.

A secured loan, on the other hand, is backed by collateral — property, savings accounts, etc. — which the lender can take possession of if the borrower defaults on the loan. This is less risky for the lender, so the loan might be easier to get, and the corresponding APR might be lower too.

Fixed-rate loans have a set APR, so the amount owed each month will be the same for the life of the loan. In contrast, the APR and interest amount owed changes on variable-rate loans. You may start paying the loan back with a low APR, and then after a few months that rate increases along with the payment owed. With a variable-rate loan, you'll want to make sure you can afford to cover those increasing payments without risking default and losing collateral.

When you apply for the loan with a creditworthy person who agrees to take responsibility for paying it back if you're unable to do it by yourself but who doesn't have access to the money, you have a co-signer. Young adults who are getting their start after college and who don't have much of a credit history might ask their parents to co-sign a loan to help them out, for example.

When you have a co-borrower, it's essentially the same except that both signers have access to the money. With either of these types, the lender will review all signers' or borrowers' information to determine the APR and other loan terms.

What do I need to apply for a personal loan?

First and foremost, you need to know why you want or need the loan. Common uses for personal loans are to pay for high-dollar expenses, such as medical bills, new appliances, or home renovations and repairs.

Another use is debt consolidation. A personal loan may have a lower interest rate than the rate on other types of loans or a credit card. If that's the case, it might make sense to use the lower-rate personal loan to pay off the high-rate debts. Before doing this, be sure to see the loan terms and conditions of those debts to try to avoid any penalties, like prepayment penalties, for example.

If a personal loan still sounds like the right option, consider these factors for eligibility. Different lending institutions have different requirements so check with your lender for more information.

• A minimum credit score
• A specific income threshold
• A minimum number of years of credit history
• A specific range for debt-to-income ratio

After seeing if you're eligible for a loan, depending on if your lender offers them, a prequalification might be the next step. For this step, you'll likely provide details, such as your name, contact information, income and the amount you want to borrow.

The lender will take that info and do a soft credit inquiry — which won't affect your credit score — to see if you fit their criteria. Although it’s important to note that not all lenders follow this step, so ask what their process is.

If you prequalify, you may receive a letter with estimates about the loan and terms. Remember: A prequalification isn't a guaranteed approval.

With a prequalification in hand and if you're shopping different lenders, ask these questions to compare and determine which offer makes the most sense:

• How much do I prequalify for?
• What's the length of the loan?
• Is the loan secured or unsecured?
• What's the estimated APR?
• Is the interest rate fixed or variable?
• How much will my monthly payment be?
• Are there any prepayment penalties?
• How do I make the payments?
• Are there any lender fees I need to consider?
• What additional charges might I incur?

Once you get your answers and compare the offers, you'll feel more confident as you apply for the loan. Also, don't forget the important step to analyzing your budget. This gives you confidence that you'll be able to pay the loan back and you can handle the associated risks. Now it's time to apply.

How to fill out a personal loan application

Many lenders provide easy online applications for personal loans, including USAA Bank. Before you start, gather the information, and documents you may need. Different lenders have different requirements for the application. Common examples include:

• Employment status (if self-employed: bank statements, 1099 forms, income tax returns)
• Proof of income (pay stubs, W-2 forms)
• Bank statements
• Proof of address
• List of expenses
• List of debts
• Official identification, sometimes two forms (driver's license, passport, state-issued ID, certificate of citizenship, birth certificate, military ID, Social Security card)

Depending on the lender, you may receive approval, close on the loan, and find the money in your account within a couple of days.

With your personal loan, you're ready to handle whatever it is that life has thrown your way. And by taking the time to research and plan, you can handle it while also knowing that you've done your best to protect your overall budget and other financial goals.