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Personal loan requirements vary by lender, but there are a few considerations, like credit score and income, that financial institutions always take into account when reviewing applicants. Before you start shopping for a loan, familiarize yourself with the common qualifications you’ll need to meet and the documents you’ll need to provide. This knowledge can help streamline the application process and can improve your chances of qualifying.
Here are five common requirements that financial institutions look at when evaluating loan applications.
1. Credit score and history
An applicant’s credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors such as payment history, amount of outstanding debt, and length of credit history. Many lenders require applicants to have a minimum score of around 600 to be eligible, but some lenders will lend to applicants without any credit history.
Lenders place income requirements on borrowers to ensure they can afford to repay a new loan. Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual minimum income requirement is only $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.
Proof of income may include recent tax returns, monthly bank statements, payslips, and signed letters from employers; independent candidates can provide tax returns or bank deposits.
3. Debt to income ratio
The debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that is allocated to servicing their monthly debt. Lenders use DTI to predict a potential borrower’s ability to make payments on new and current debt. For this reason, a DTI of less than 36% is ideal, although some lenders will approve a highly qualified applicant with a ratio of up to 50%.
If you apply for a secured personal loan, your lender will ask you to pledge valuable assets or collateral. In the case of home or auto loans, collateral is usually tied to the underlying purpose of the loan. However, secured personal loans can also be secured by other valuable assets, including cash accounts, investment accounts, real estate, and collectibles like coins or precious metals.
If you are behind on your payments or fail to repay your loan, the lender can repossess the collateral to recover the remaining balance of the loan.
5. Set-up costs
Although not part of the qualification process, many lenders require borrowers to pay a personal loan origination fee to cover the costs of processing applications, running credit checks, and closing. These fees typically range between 1% and 8% of the total loan amount, depending on factors such as the applicant’s credit rating and loan amount. Some lenders collect origination fees in cash at closing, while others fund them as part of the loan amount or subtract them from the total loan amount disbursed at closing.
Typical personal loan documents
When it’s time to officially apply for a personal loan, your lender will ask you for a number of documents to confirm everything from your identity to your residency and employment. Here are the most common documents required by lenders as part of the personal loan application process.
A loan application is an official document that lenders ask potential borrowers to complete and submit to begin the loan process. Each lender has their own application, so specific requirements may vary. Generally, however, you will need to provide basic personal information, the amount you wish to borrow, and the purpose of the loan.
The format of a loan application may also vary by lender. Although there are many online lenders that offer a completely online application experience, others may need to discuss your application over the phone before making a decision. There are also a number of physical banks and financial institutions that require applicants to submit a paper application in person.
Most lenders require applicants to provide at least two pieces of government-issued identification to prove they are at least 18 years old and a citizen of the United States. This precaution also reduces the threat of identity theft. Acceptable government-issued identification often includes:
- Driving license
- Other government-issued ID
- Citizenship certificate
- Birth certificate
- Military ID Card
Verification of employer and income
A lender wants to see that you have the ability to repay your current debts as well as the new loan. To do this, lenders typically require potential borrowers to demonstrate their work history and current income as part of the application process. Common forms of income verification for traditional employment include:
- W-2 and 1099
- Bank statements
- Employer contact details
Prospective borrowers who are self-employed must instead rely on bank statements, 1099 forms and tax returns.
Proof of address
In addition to confirming your employment, most lenders want to know that you have a stable living situation. This may involve providing proof of your address, including a recent utility bill, a copy of your lease or other rental agreement, a voter registration card, or proof of home, rental, or auto insurance showing your address. .
How to qualify for a personal loan
There is no single formula for qualifying for a personal loan – each applicant’s financial situation is different and unique. However, there are rules of thumb and recommendations that can help improve your chances of getting a personal loan.
Most personal lenders look at your credit score, credit history, income, and DTI ratio to determine your eligibility. Although the minimum requirements for each of these factors vary for each lender, our recommendations include:
- Minimum credit score of 670. Maintaining a credit score of at least 670 will improve your chances of qualifying. However, if you want the most favorable terms, we recommend a minimum score of 720.
- Constant and stable monthly income. Minimum income requirements can vary widely between lenders, with some having no requirements at all. However, having a constant and stable income is essential at a minimum to demonstrate that you can afford your monthly payments.
- DTI ratio below 36%. While some lenders will approve a highly qualified candidate with a ratio of up to 50%, it’s best to aim for a DTI below 36% to improve your chances of qualifying.
Since each lender has their own minimum requirements, it is in your best interest to prequalify where possible and confirm with the lender what criteria you must meet. This will ensure that you only apply for loans that match your specific financial situation.
How to get a personal loan
You can often complete personal loan applications online and a decision may be available the same day. However, there are a few things you need to do before you even complete the application. If you’re ready to apply for a personal loan, consider these steps before you begin the process:
- Check your credit score
- Take steps to improve your score by checking for inaccuracies and paying off debt
- Decide how much you want to borrow
- Use lender prequalification to find competitive rates
- Submit a formal loan request
Related: How do personal loans work?
What should you do if you are refused?
A lender may deny your personal loan application for a number of reasons. Your credit score may be too low or your DTI may be too high. It’s also possible that you’ve asked to borrow more money than the bank thinks it can repay based on factors such as income, job stability, and other outstanding debts.
If a lender declines your personal loan application, there are a few steps you can take to improve your chances of getting a loan in the future:
- Ask the specific reason why your application was rejected
- Review your loan application for errors or inaccuracies
- Improve your credit score by paying off your outstanding debts
- Check for errors on your credit report
- Increase your income
- Compare lender requirements
- Request a lower loan amount
- Consider using a co-signer
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Frequently Asked Questions
What can be used as collateral for a personal loan?
Lenders only require collateral for secured personal loans. If you apply for a secured loan, you can generally use the following assets as collateral:
- Cash in a savings account or certificate of deposit (CD)
- Insurance policy
- fine arts
- Precious metals
- future paychecks
How long does it take to get a personal loan?
Personal loan turnaround times vary between online lenders, traditional banks, and credit unions. Online lenders are generally the fastest, with some lenders offering same-day approvals and same-day or next-day financing. Traditional banks and credit unions, on the other hand, can take up to seven days to get funded.
Can you get a personal loan without proof of income?
Not only is your income a crucial part of the qualification process on the lender’s side, but it is also critical to your ability to repay your loan. Most lenders require proof of income to confirm your ability to meet your repayment obligations. If you don’t have a job or other source of income and can’t afford a personal loan, it’s best to avoid getting into further debt.
What’s stopping you from getting a personal loan?
Personal loan denials vary, but the most common reasons relate to your credit score, credit history, and income. Potential borrowers who have weak, damaged, or no credit usually find it difficult to qualify for a personal loan. However, even if you have good credit, it does not mean that you will qualify for a personal loan. If your income doesn’t prove you can afford monthly payments, lenders are usually unwilling to take on the risk.