Personal Loan Requirements and How to Meet Them
A personal loan is a lump-sum installment loan, typically ranging from $1,000 to $50,000 and often used to overcome a financial emergency or consolidate high-interest debt. To secure this type of funding, you’ll need to meet lenders’ personal loan eligibility requirements.
Snagging a lower interest rate is obviously ideal, but locking down inexpensive terms isn’t always easy. Personal loan requirements put your credit score, payment history and income under the microscope as lenders determine whether you qualify and which rates you could access.
Understanding your personal loan eligibility is an imperative first step if you hope to leverage this form of credit to improve your financial health.
In this article, we’ll cover…
Common personal loan requirements
Before you can start the application process, you’ll first need to familiarize yourself with how to qualify for a personal loan. While every lender is different, most base personal loan eligibility on the following factors:
Credit score
This is by far the most important factor. Lenders view your credit score as an indication of how creditworthy you are.
A lower credit score suggests that you might be a risky borrower. Lenders protect themselves from this risk by tacking on higher interest rates, while reserving the most competitive rates and terms for those with excellent credit.
“If your score is less than 640, you’re probably not going to find a very reasonable personal loan,” says Michael Kelley, a Cleveland-based certified financial planner.
Personal loans tend to run up to 36% annual percentage rate (APR), but with an excellent credit score, you should be able to find APRs in the single digits.
Tip: If a low score prevents you from meeting personal loan requirements or securing a reasonable interest rate, adding a cosigner to a loan could tip the scales. If that’s not an option, it’s time to revisit why you’re seeking a personal loan to begin with (more on this in a minute).Payment history
This goes hand in hand with your overall credit score. Your payment history carries the most weight when it comes to determining your score — it makes up 35% of your FICO Score. This is precisely why having a history of missed payments will come back to haunt you; a single late payment can stay on your credit report for up to seven years.
Lenders are looking for some degree of reassurance that you will, in fact, make good on your personal loan payments. A solid track record of making on-time payments will increase your odds of getting approved.
Income
Before giving you the stamp of approval and issuing a check, lenders want to make sure you have steady income to direct toward your payments.
“Outside of general credit score questions, they’re going to check into your income,” says Kelley. “They’re also going to want to know how much you want to borrow, and how long you want to borrow it for.”
Note that a shorter personal loan term translates to higher monthly payments: Let’s say you’re seeking a $15,000 loan with a repayment period of five years and an interest rate of 8%. Your monthly payment will work out to about $304, while a three-year term means a monthly payment of about $470. While the shorter term means paying more from month to month, it’s actually cheaper in the long run because you would spend $1,327 less in overall interest.
Debt-to-income ratio
Regardless of the repayment period, lenders really only care about one thing: after accounting for all your other existing debt payments, can your income cover this new monthly payment? This is where your debt-to-income (DTI) ratio comes into play.
Your DTI gives lenders an idea of how much of your current income is already going toward debt. To calculate yours, add up all your minimum monthly debt payments, then divide the total by your gross monthly income.
“If the average is 35% or lower, you’re considered a good candidate for a personal loan,” says Laura Morganelli, a Pennsylvania-based certified financial planner.
2 questions to ask before considering your personal loan eligibility
Even if you meet personal loan eligibility requirements, taking on this form of debt may not be the right choice for you. These are the most important factors to consider before pulling the trigger.
1. Do you actually need a personal loan?
This is perhaps the most obvious — but important — question. The idea of having a lump sum of cash delivered to your bank account almost instantly can be tempting. Before making the leap, Morganelli suggests taking a good, hard look at why you’re seeking this type of financing in the first place.
“If you’re overspending and feel like you’re running a deficit on a month-to-month basis, applying for a personal loan to help cover that is never a good idea because you’re never going to have the means to keep up with what you’re spending,” she says.
In other words, turning to a personal loan to make up for ongoing shortfalls is a surefire way to dig an even deeper debt hole. Reckoning with your financial behavior is key.
The same goes for financing a big-ticket purchase you don’t really need, like a flat-screen TV or an all-inclusive cruise vacation.
Of course, some expenses truly are unavoidable, especially if you’re facing a stint of unemployment or some other large-scale financial emergency and don’t have a rainy day fund to fall back on.
Speaking of financial emergencies, if you’re currently tied to sky-high interest rates across multiple credit cards, that definitely deserves your immediate attention. Using a personal loan for debt consolidation and ultimately save money in the long run is a no-brainer if you qualify for a reasonable interest rate and repayment term. What’s more, it can also pull up your credit score since paying off those credit card balances will reduce your credit utilization ratio.
If a less-than-perfect credit score is holding you back, Morganelli recommends paying down debt and improving your score before trying again later down the road.
2. Can you afford a personal loan?
This is another important question. Just because you know how to qualify for a personal loan on paper doesn’t mean your budget can realistically handle the new monthly payment, especially if you’re in the process of saving for other financial goals. LendingTree’s short-term loan calculator is an easy way to ballpark what your monthly payment will actually be, not counting any additional loan costs.
“Things to look for when considering a personal loan include prepayment penalties, application fees and origination fees,” says Kelley.
Every lender has its own set of criteria, but many personal loans tack on an origination fee of 1% to 8%. If you’re looking to save some money and avoid an origination fee, you may want to consider no-fee personal loans that may go a little easier on your wallet. And if you’d eventually like to accelerate your payments and pay it off sooner rather than later, it would serve you well to go with a lender that won’t charge a prepayment penalty.
When all is said and done, personal loans are an excellent source of short-term financing if you can easily take on the monthly payment. But as Morganelli suggested previously, this has everything to do with addressing your financial behavior so that the new loan doesn’t inadvertently end up feeding the debt cycle.
“Is this something you’re doing to kind of slap on some tape and seal the leak, financially speaking?” she asks, warning that using a personal loan to cover overspending only delays the inevitable. At some point, the bill will come due.
How to get a personal loan in 3 steps
Ready to jump-start the application process? Here’s what you can expect:
1. Review your credit score and credit report
In the land of personal loan requirements, your credit score reigns supreme. You can check your score (with no impact) in a matter of minutes with LendingTree Spring. Reviewing your credit report at least once per year is another good habit. You’ll be able to see the debts and accounts affecting your score.
Credit scores can range from 300 to 850, but many lenders require a minimum score of 600 to approve a borrower for a personal loan. Keep the following factors in mind as you review your credit report:
- Payment history
- Amounts owed
- Length of credit history
- Credit mix
- New credit
You can also pull your credit report for free every year at AnnualCreditReport.com.
If a lower-than-average score is standing between you and a personal loan, you can pay off credit card debt the old-fashioned way until your score improves enough to qualify.
2. Find lenders and get prequalified
Finding personal loan lenders is a relatively easy task these days, thanks to the internet. Using LendingTree’s personal loan tool, simply enter some basic information about yourself and what you need out of a loan. You’ll receive loan offers which you can compare and potentially apply for.
You can also apply directly with lenders on their website or in person at a bank branch. Just ensure they’ll prequalify you without performing a hard check on your credit report.
“That’s what’s nice about the flexibility of a personal loan,” says Kelley. “You have the ability to tell them exactly what you want and how long you want to borrow it for. In some cases, you can say how much you can afford each month, and the lender will work with you to find a loan that fits into your monthly budget.”
3. Shop around and gather your paperwork
Once you’ve been prequalified, the next step is comparing quotes to find the best lender for your needs. Remember: lenders don’t dole out money for free, so really read the fine print to make sure there aren’t any surprises.
“It’s not a one-size-fits-all situation, and each institution is going to have their own criteria, so really make sure you’re getting the best deals before getting into it,” says Morganelli.
When you feel good about your decision and you’ve landed on an interest rate, repayment term and monthly payment you’re comfortable with, prepare to gather the supporting documentation to meet your lender’s personal loan requirements. This includes proof of employment, income and your residence, among other things.
Personal documents you need to take out a loan
Lenders will typically require that you submit documentation to verify your information when going through the personal loan process. Here are a few documents you can expect to provide:
- A loan application: The first step in getting a personal loan is to submit an application to a lender. This form should include your personal information, but also the reason for your loan, your credit score and income. After you turn in your application, your potential lender may contact you to verify the information you have provided.
- Personal identification: You’ll typically need to prove to lenders that you are who you say you are. You may need to provide government-issued IDs, such as your driver’s license, birth certificate or passport, as well as your social security number.
- Proof of address: Lenders may want to know where you live so they can send you bills and contact you. You may have to provide documents such as a copy of your lease agreement or utility bill to prove that you live at the address you stated.
- Proof of income: Lenders want to know that, if they lend you money, they’ll be repaid. Your income can give lenders insight into whether you are able to repay the loan. To verify this, you may have to give documents such as W-2s, pay stubs or tax returns.
What to do if you’re denied for a personal loan
If your personal loan application is rejected, there could be a variety of reasons behind the lender’s decision:
- Your credit history isn’t long enough
- Your debt-to-income (DTI) ratio is too high
- Your credit score is too low
- Your credit history isn’t varied enough
- Your income isn’t large enough
If this happens, don’t be too discouraged. There may be other personal loan lenders that will be willing to work with you. Importantly, there are many ways to improve your chances in the future.
Here’s what you can do if you’re denied a personal loan:
- Carefully review your credit report. Unfortunately, mistakes and fraudulent activity can happen and these instances can make a dent in your credit score. As a result, they can make lenders cautious to work with you, so it’s important that you address these issues quickly. You can do this by disputing any errors and fraudulent activity you find.
- Improve your DTI ratio by paying off old debt. If you have a high DTI ratio, lenders may see this as your budget being stretched too thin, and they may believe you will be unable to afford the loan. To offset this, you can work on increasing your income and aggressively pay off old debt. You can use tactics such as the debt avalanche and debt snowball methods.
- Make sure you’re current on all your bills. Late payments can show up on your credit report for up to seven years and can signal to a lender that you may not pay on time in the future either. As a result, the lender may be hesitant to offer you a loan. Some lenders also require that you have no overdue debts, so you’ll want to check for that criteria as well.
- Apply with a cosigner. A low credit score can be a challenging barrier for borrowers looking to get a personal loan. Applying with a cosigner can make this process a bit easier for you. The credit requirements may not be as high if you apply with a cosigner since that cosigner is also taking legal responsibility for the repayment of the loan. If your cosigner has a better credit score, the lending risk may be viewed as much lower. These personal loans allow for you to apply with a cosigner.
- Offer up collateral. Applying for a secured loan is another way to get around having a poor credit score. In the eyes of lenders, putting a valuable asset on the table reduces the risk of lending to someone who might not otherwise meet their credit requirements. However, if you’re unable to pay off a secured loan, remember that your lender can seize the offered asset and sell it to recoup their losses. Here are several lenders that offer secured personal loans and their collateral criteria.
- Seek a smaller loan amount. If you’re looking for a large loan but have a lower income and/or poor credit score, some lenders may not be willing to work with you. Borrowers in these situations typically receive much lower borrowing amounts. Consider applying for small personal loans to see if that improves your chances.
Personal loan eligibility: FAQ
Am I eligible for a personal loan?
Many lenders typically require that you have a credit score of at least 600 and a debt-to-income (DTI) ratio no more than 35%. However, since each lender is different, you’ll need to research the lenders you’re interested in to understand the specifics.
If you don’t meet a lender’s personal loan qualifications because of your credit score, consider looking into bad credit loans.
How long will it take for me to get a personal loan?
Receiving a personal loan from a lender can take anywhere from one to three business days (or more) after you’ve been approved, depending on the lender. Online loan lenders typically tend to be a bit quicker with funding than banks as they don’t require you to physically travel to a location as some banks do. Lenders like LightStream may fund your personal loan within one business day of approval.
How do I know if I will qualify for a loan?
Each lender has their own personal loan eligibility requirements you’ll need to fulfill. Just because you don’t qualify with one lender doesn’t mean others won’t be willing to work with you. Lenders typically list their basic personal loan requirements on their websites, so you can sometimes find out whether you’re likely to qualify without ever having to apply. Here are a few of the criteria you’ll need to look out for:
- Minimum credit score
- Maximum DTI ratio
- Minimum income
- Citizenship
What can I use as collateral for a personal loan?
The following types of assets may be used as collateral for a secured personal loan. Keep in mind that any valuable property you put down may be seized by your lender if you’re unable to repay.
- Vehicles
- Bank accounts
- Real estate
- Life insurance policies
- Investments