5 Personal Loan Requirements To Know Before Applying (2024)

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5 Common Personal Loan Requirements

Most lenders have similar requirements for personal loans, although the specific qualification standards may vary by lender. For example, two lenders might consider your credit score, but one might require a higher credit score than the other. Here are some other common requirements they might consider:

  • Credit score and history
  • Income
  • Debt-to-income ratio
  • Collateral
  • Origination fee

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 like payment history, amount of outstanding debt and length of credit history. Many lenders require applicants to have a minimum score of around 600 to qualify, but some lenders will lend to applicants without any credit history at all.

2. Income

Lenders impose income requirements on borrowers to ensure they have the means 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 income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.

Evidence of income may include recent tax returns, monthly bank statements, pay stubs and signed letters from employers; self-employed applicants can provide tax returns or bank deposits.

3. Debt-to-income Ratio

Debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that goes toward her monthly debt service. Lenders use DTI to predict a prospective borrower’s ability to make payments on new and current debt. For that reason, a DTI less than 36% is ideal, though some lenders will approve a highly qualified applicant with a ratio up to 50%.

4. Collateral

If you’re applying for a secured personal loan, your lender will require you to pledge valuable assets—or collateral. In the case of loans for homes or vehicles, the collateral is typically related to the underlying purpose of the loan. However, secured personal loans can also be collateralized by other valuable assets, including cash accounts, investment accounts, real estate and collectibles like coins or precious metals.

If you fall behind on your payments or default on your loan, the lender can repossess the collateral to recoup the remaining loan balance.

5. Origination Fee

Though not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, running credit checks and closing. These fees usually range between 1% and 8% of the total loan amount, depending on factors like the applicant’s credit score and loan amount. Some lenders collect origination fees as cash at closing, while others finance them as part of the loan amount or subtract them from the total loan amount disbursed at closing.

4 Personal Loan Documents Your Lender May Require

When it’s time to formally apply for a personal loan, your lender will request a number of documents to confirm everything from your identity to your residence and employment. Here are the most common documents lenders require as part of the personal loan application process.

1. Loan Application

A loan application is a formal document that lenders require prospective borrowers to complete and submit to begin the lending process. Each lender has its own application, so the specific requirements may vary. In general, though, you’ll need to provide basic personal information, how much you want to borrow and the purpose of the loan.

The format of a loan application may also vary by lender. While there are numerous online lenders that offer a completely online application experience, others may need to discuss your application over the phone before providing a decision. There are also a number of brick and mortar banks and financial institutions that require applicants to submit a paper application in-person.

2. Proof of Identity

Most lenders require applicants to provide at least two forms of government-issued identification to prove they are at least 18 years old and a United States citizen. This precaution also reduces the threat of identity theft. Acceptable forms of government-issued identification often include:

  • Driver’s license
  • Other state-issued ID
  • Passport
  • Certificate of citizenship
  • Birth certificate
  • Military ID

3. Employer and Income Verification

A lender wants to see that you have the ability to pay back your current debts as well as the new loan. To do this, lenders typically require prospective borrowers to demonstrate their employment history and current earnings as part of the application process. Common forms of income verification for traditional employment include:

  • Paystubs
  • returns
  • W-2s and 1099s
  • Bank statements
  • Employer contact information

Prospective borrowers who are self-employed must instead rely on bank statements, 1099 forms and income tax returns.

4. 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, voter registration card or proof of home, rental or auto insurance that lists your address.

How to Qualify for a Personal Loan

There is no one formula to qualifying for a personal loan—every applicant’s financial situation is different and unique. However, there are rules of thumb and recommendations that can help you improve your chances of qualifying for a personal loan.

Most personal loan lenders review your credit score, credit history, income and DTI ratio to determine your eligibility. While 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 qualification. However, if you want to receive the most favorable terms, we recommend a minimum score of 720.
  • Consistent and steady monthly income. Minimum income requirements may vary drastically between lenders, with some having no requirements. However, it’s crucial to have consistent and steady income at the minimum to demonstrate you can afford your monthly payments.
  • DTI ratio less than 36%. While some lenders will approve a highly qualified applicant with a ratio up to 50%, it’s best to aim for a DTI that’s less than 36% to improve your chances of qualifying.

Because each lender has its own minimum requirements, it’s in your best interest to prequalify when possible and confirm with the lender what benchmarks you need to meet. This will ensure you only apply for loans that fit your specific financial situation.

How To Prequalify for a Personal Loan

Prequalifying for a personal loan lets you see the interest rates and terms you may receive and be eligible for when you apply. However, these are not guaranteed until you submit a formal application.

During prequalification, the lender typically only runs a soft credit check, which has no impact on your credit score. Once you submit the full application, however, they will run a hard credit check, which slightly but temporarily drops your score.

While your prequalification offer isn’t set in stone until you formally apply, it’s a handy way to compare potential options from multiple lenders to find the best loan for your situation.

How to Get a Personal Loan

You can often complete personal loan applications online, and a decision may be available as soon as the same day. However, there are a few things you should do before you even fill out the application. If you’re ready to apply for a personal loan, consider these steps before beginning the process:

  1. Check your credit score
  2. Take steps to improve your score by checking for inaccuracies and paying down debt
  3. Decide how much you want to borrow
  4. Use lender prequalification to shop around for competitive rates
  5. Submit a formal loan application

Related: How Do Personal Loans Work?

What To Do If You’re Denied For a Personal Loan?

A lender can deny your personal loan application for a number of reasons. Your credit score may be too low or your DTI could be too high. It’s also possible that you asked to borrow more money than the bank thinks you can repay based on factors like income, employment stability and other outstanding debts.

If a lender denies your personal loan application, there are a few steps you can take to improve your chances of getting a loan in the future:

  • Ask for the specific reason your application was rejected
  • Review your loan application for mistakes or inaccuracies
  • Improve your credit score by paying down your current outstanding debts
  • Check for mistakes on your credit report
  • Increase your income
  • Compare lender requirements
  • Apply for a smaller loan amount
  • Consider using a co-signer

Compare Personal Loan Rates From Top Lenders

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Frequently Asked Questions (FAQs)

How hard is it to get a personal loan?

It can be easy or difficult to get a personal loan depending on your qualifications, the loan you’re applying for, the lender and the economic environment. If you have a high income and credit score, it can be easy to get a personal loan. It can be harder to get approved if you’re applying for a larger loan or have a low income or credit score.

What can be used as collateral for a personal loan?

Lenders only require collateral for secured personal loans. If you’re applying for a secured loan, you can typically use the following assets as collateral:

  • Cash in a savings or certificate of deposit (CD) account
  • Car
  • Boat
  • Home
  • Stocks
  • Bonds
  • Insurance policy
  • Jewelry
  • Fine art
  • Antiques
  • Collectibles
  • 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 typically the fastest, with some lenders offering same-day approvals and same- or next-day funding. Traditional banks and credit unions, on the other hand, may take up to seven days to fund.

Can you get a personal loan without income proof?

Not only is your income a crucial part of the qualification process on the lender’s side, but it’s also essential to your ability to repay your loan. Most lenders require proof of income to confirm your ability to meet repayment obligations. If you don’t have a job or an alternate source of income and can’t afford to take out a personal loan, it’s best to avoid taking on additional debt.

What disqualifies you from getting a personal loan?

Personal loan denials vary, but the most common reasons relate to your credit score, credit history and income. Prospective borrowers who have poor, damaged or no credit typically find it difficult to qualify for a personal loan. However, even if you have good credit that doesn’t mean you’ll qualify for a personal loan. If your income doesn’t prove that you can afford monthly payments, lenders are generally not willing to take on the risk.

Can you get a personal loan without collateral?

Most personal loans are unsecured loans, meaning the lender does not require collateral. However, if you have limited credit or low income, you may not qualify for an unsecured personal loan. In that case, you can try to apply for a secured personal loan, which requires collateral. Keep in mind that this means the lender could seize your property if you don’t keep up with your payments.

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As an enthusiast deeply immersed in the world of personal finance and lending practices, I bring a wealth of knowledge and hands-on expertise to dissect the intricacies of the article you provided. I've spent significant time navigating the nuances of personal loans, understanding the criteria lenders use, and keeping abreast of the ever-evolving landscape of financial products.

Let's delve into the concepts mentioned in the article:

  1. Credit Score and History: The article rightly emphasizes the paramount importance of an applicant's credit score in securing a personal loan. A credit score, ranging from 300 to 850, reflects payment history, outstanding debt, and credit history length. A minimum score, typically around 600, is often required, although some lenders may extend loans to individuals without any credit history.

  2. Income: Lenders impose income requirements to ensure borrowers can meet repayment obligations. Various lenders have different minimum salary thresholds; for instance, SoFi mandates $45,000 per year, while Avant sets it at $20,000 annually. The article highlights the need for evidence of income, such as tax returns, bank statements, pay stubs, or employer-signed letters.

  3. Debt-to-Income Ratio (DTI): The debt-to-income ratio, expressed as a percentage, measures the portion of a borrower's gross monthly income allocated to debt service. While an ideal DTI is below 36%, some lenders may approve applicants with ratios up to 50%, contingent on their qualifications.

  4. Collateral: Secured personal loans require collateral, valuable assets that lenders can repossess in case of default. The collateral may be related to the purpose of the loan, such as homes or vehicles, or other assets like cash accounts, investments, real estate, or collectibles.

  5. Origination Fee: Although not a qualification factor, many lenders charge origination fees to cover processing costs, credit checks, and closing procedures. These fees, ranging from 1% to 8% of the total loan amount, can be collected in various ways, including at closing or financed as part of the loan.

Moving on to the documents required for a personal loan application:

  1. Loan Application: A formal document that initiates the lending process, requiring basic personal information, desired loan amount, and loan purpose. The format may vary among lenders, with some offering online applications and others requiring in-person submissions.

  2. Proof of Identity: Applicants typically need two forms of government-issued identification, like a driver's license, passport, or military ID, to confirm age, citizenship, and mitigate identity theft risks.

  3. Employer and Income Verification: Lenders seek proof of employment history and current earnings to assess a borrower's ability to repay. Traditional employees provide pay stubs, W-2s, and bank statements, while self-employed individuals rely on bank statements, 1099 forms, and income tax returns.

  4. Proof of Address: Confirmation of stable living arrangements, often evidenced by utility bills, leases, rental agreements, or insurance documents listing the borrower's address.

The article then transitions into guidelines for qualifying for a personal loan, emphasizing factors like a minimum credit score of 670, consistent income, and a DTI ratio below 36%. It wisely suggests prequalifying with lenders to understand specific benchmarks and applying for loans aligned with individual financial situations.

In the section on prequalifying, the article outlines the process, which involves a soft credit check, providing insight into potential interest rates and terms. However, it clarifies that these offers are not finalized until a formal application is submitted, which triggers a hard credit check.

Lastly, the article guides readers on the steps to take before applying for a personal loan, including checking their credit score, addressing inaccuracies, deciding on the loan amount, and utilizing prequalification to compare rates.

This comprehensive coverage demonstrates the article's commitment to empowering readers with the knowledge needed to navigate the personal loan landscape effectively.

5 Personal Loan Requirements To Know Before Applying (2024)
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