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Personal loans can be used for almost any purpose. In fact, they are one of the most flexible ways to borrow money, without the high interest rates that credit cards charge. So, what’s stopping people from borrowing money for a yacht and cruising away to the Mediterranean, never to return? Simple: They need to meet the lender’s personal loan requirements.
Personal loan qualifications vary by lender — there is no universal list. However, there are certain red and green flags that lenders commonly look for in a borrower’s credit history and application file. They are compiled here to help you prepare before you apply.
Key Points
• Personal loans can be used for various purposes and offer flexibility without high interest rates.
• Lenders may consider credit score, collateral, proof of income and employment, debt-to-income ratio, and origination fees when approving personal loans.
• A higher credit score can increase the likelihood of loan approval and favorable interest rates.
• Collateral may be required for secured loans, while unsecured loans don’t need collateral but can have higher interest rates.
• Proof of income and employment is necessary to ensure the borrower’s ability to repay the loan.
1. Credit Score Requirements for a Personal Loan
One of the key lending criteria for personal loans is a sufficient credit score. There’s no universal minimum credit score for personal loans. However, in general, the higher the credit score, the more likely lenders are to approve a loan and give the borrower a more favorable interest rate. The lower your interest rate, the less money you’ll pay over time. Some lenders will allow a personal loan for a credit score of 580 or better. A credit score below this level may be a reason for a denied personal loan for some applicants.
Many lenders consider a score of 670 or above to indicate solid creditworthiness and it is at this level that you could start to qualify for better interest rates. If your credit score is on the lower side, you might still qualify for a personal loans for bad credit, but the terms may not be as favorable. Some lenders specialize in working with borrowers with lower credit scores, although you might face higher interest rates or stricter repayment terms.
If you apply for prequalification, many lenders will run a soft credit check (which doesn’t affect your credit score) in order to see if you’re a good candidate for a personal loan. As the process moves forward, and an applicant actually applies for a personal loan, lenders will usually do a hard credit check (that is, a deep dive into the applicant’s credit history). A hard credit check may knock several points off your credit score and can continue to impact your score for a few months.
Most lenders review your credit history as well as your credit score, plus other financial factors like your income, to create a holistic view of your financial situation.
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2. Collateral: Secured vs. Unsecured Personal Loans
There are two types of personal loans: collateralized and uncollateralized. Collateral is something of value that is used as security for repayment of a loan. In the event of default, the bank or lender may be able to seize the property from the borrower.
When a loan requires collateral, it’s referred to as a “secured loan.” When it does not, it is called an “unsecured loan.” From a lender’s perspective, unsecured personal loans are riskier. Therefore, the requirements for secured and unsecured loans are typically different.
Typically, when people talk about personal loans, they’re referring to unsecured personal loans. Because these loans aren’t backed by collateral, they may have higher average interest rates or be harder to qualify for than secured personal loans. Some lenders and banks require collateral for personal loans. Anything from cars to property can be used as collateral, and can be seized in the event that you fail to make your loan payments.
It’s a tradeoff that’s worth weighing before you apply for a personal loan. If you put your property on the line, you could lose it. But taking that risk may qualify you for a lower interest rate.
On the flip side, using collateral on a personal loan can come with hidden costs. For example, some lenders may require you to have additional insurance in the event the collateralized property is damaged.
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3. Proof of Income and Employment
Most lenders will want to be sure that you are gainfully employed and have sufficient income to repay the loan. Proof of income and employment can be required by many lenders to verify how you will repay the loan. This is one way they can determine the likelihood that you’ll pay it back. Plus it can affect things like the interest rate or payback term you’re offered.
Acceptable Income Sources
Like most personal loan requirements, “proof of income” can mean different things for different lenders. Some lenders require a signed letter from your employer, while others need pay stubs or W2s.
If you are self-employed and want a personal loan, you might need to submit a copy of your tax returns or provide bank deposit information. If you’re considering applying for a personal loan while unemployed, you’ll want to carefully weigh the pros and cons before moving forward.
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4. Debt-to-Income Ratio
Another important personal loan qualification is debt-to-income ratio (DTI). The DTI calculation compares your gross monthly income to the monthly payments you make on your debt. Generally, the lower your DTI, the more desirable you are as a borrower for any lender. To qualify for a personal loan, you’ll need a DTI ratio of no more than 36%, though 10% or lower is considered ideal.
For example, someone earning $120,000 per year might seem like they’re doing great. That’s $10,000 in gross income per month. But let’s say they’re actually having a tough time making ends meet because they’re paying $6,000 per month toward their credit card and student loan debt. Their DTI ratio is 60%, which is considered high — and might make them less desirable to lenders.
Conversely, someone with a lower income, say $60,000 per year, might get better terms on their personal loan offer if they are only paying $500 a month toward student loans. In this scenario, they are earning $5,000 per month and paying $500 per month toward debt, which makes their DTI ratio 10%.
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5. Other Personal Loan Eligibility Criteria
There are a few other hurdles you’ll have to clear before you can obtain a personal loan.
Age and Citizenship Requirements
Personal loan qualifications include minimum age. Most lenders will require you to be at least 18 in order to obtain a personal loan, and some require borrowers to be 21. Younger borrowers may be asked to provide a work history or a cosigner. Your personal loans eligibility also depends to some extent on your citizenship status. Noncitizens can sometimes qualify, but they may need to jump through a few more hoops to do so. They may be required to have a U.S. credit history or a cosigner who is a U.S. citizen.
Origination Fees and Loan Terms
This one is a personal loan requirement rather than a qualification, per se. Some lenders charge a one-time “origination fee,” which is intended to cover the cost of processing the loan. Origination fees vary by lender and the borrower’s financial situation. Some lenders charge a flat fee for personal loans, while others charge a percentage of the total loan amount. These fees usually range from 1% to 10%, but they can go as high as 10%.
This can be a considerable sum of money, depending on the loan size. Note that you can typically roll this cost into your loan’s total or pay it out of your loan’s principal.
How to Qualify for a Personal Loan
Savvy consumers know that they may have work to do to meet personal loans eligibility criteria before applying for a personal loan. Some tasks are relatively quick, like pulling together financial documents. Other things take more time, like practicing good financial habits over the long term so that your credit score is at its best. Once you have your financial ducks in a row, you can feel more confident that you’ll get your personal loan approved.
Below are a few things to keep in mind if you’re considering applying for a personal loan.
Maintain a Stable Income
Lenders typically prefer a borrower with a stable income. If you plan to apply for a personal loan, it may not be the time to change careers.
If there are other ways to boost your income in the meantime, it may help your chances of qualifying and getting favorable loan terms. Whether that means asking for a raise or picking up part-time work, increasing your cash inflow can make you a more desirable borrower in the eyes of a lender — although not all income is considered eligible.
Consider a Cosigner or Co-Borrower
A cosigner is someone who agrees to pay the loan if you default. A personal loan co-borrower is someone who may reside with you and takes the loan out with you — their name is on the loan, and you both have an obligation to repay it. Either may improve your chances of qualifying for a personal loan, as lenders view both as an extra layer of repayment security.
Before deciding to bring someone else into the equation, check with your lender if a cosigner or co-borrower is allowed. Then carefully consider the potential drawbacks for both parties involved. For instance, a cosigner might see a decrease in their credit score if you fail to make a payment. And a co-borrower would have to pay the loan themselves if you default.
Monitor Your Credit Score
If your credit history is less than ideal, you may want to monitor your credit score to learn what actions (or inaction) might hurt it. You can request your credit report for free from each of the three major credit reporting agencies — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com.
Check your credit history for errors, such as fraud, misreporting, or a card accidentally opened in your name. If necessary, file a dispute online asking the credit bureaus to remove the errors. But keep in mind that fixing issues on your credit report could take time.
Do your best to pay every bill on time, and try to reduce how much debt you’re carrying relative to your credit limits. For instance, pay down outstanding debt as much as you can. It may also help to pay your credit card bill in full each month.
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Applying for a Personal Loan
Often it’s better to save for a big expense, even if it takes a few months or years. However, if that’s not possible, a personal loan can be a better option than charging the expense to a credit card.
When applying for a personal loan, start by figuring out how much you’d like to borrow. (A personal loan calculator can help you decide.) You’ll also want to check your credit score, and get prequalified with multiple lenders. Once you choose a lender, you’ll submit your application. This is when you’ll need your financial documents, such as pay stubs, tax returns, and bank statements.
After that there should be no more wondering, “am I eligible for a personal loan?” because you’ll soon learn whether or not you qualify.
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How to Get a Personal Loan
Wondering where you can get a personal loan? They’re available from traditional banks, credit unions, and lenders that do business entirely online, without brick-and-mortar branches. If you’d like to do business with a particular bank, you might start your inquiries there. Existing customers may get better interest rates or receive their funds sooner.
You can also shop around online to check going rates and terms. With online lenders, it’s easy to compare offers. Plus the entire application process is digital.
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The Takeaway
Qualifications for a personal loan typically include a credit score of at least 580, proof of income, and a debt-to-income ratio below 30%. Some lenders require collateral to secure your loan; if you default, the lender can seize your property. Lenders may also charge an origination fee of 1% to 10%. Before you apply for a personal loan, maintain a stable income, monitor your credit score, and get a cosigner with excellent credit if necessary. The application process is usually straightforward if you have your financial documentation ready.
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FAQ
What can be used as collateral for a personal loan?
Just about any asset you own can be used for collateral on a personal loan. That includes your home, car, savings account, investments, and jewelry or collectibles.
How do I know if I will qualify for a loan?
To “preview” the loan terms you qualify for, you can get prequalified online for a personal loan. You won’t have to ask, “am I eligible for a personal loan?” because you’ll soon see the loan amount you could be approved for, plus your interest rate, any fees, and repayment term. Prequalification requires a soft credit check only, which won’t hurt your credit score.
Can you get a personal loan without income proof?
Yes, it is possible to get a personal loan without income proof. However, it will be more difficult to qualify, since your credit score and history will have to be exemplary enough to compensate for the lack of income proof. Also, keep in mind that a stable income is more important to lenders than a high salary. If you have a modest income and excellent credit, you may still qualify for favorable loan terms.
What disqualifies you from getting a personal loan?
There are a number of factors that could disqualify you from taking out a personal loan. Examples include a bad credit score or no income, among other considerations.
Do all personal loans require proof of income?
Generally speaking, most lenders require proof of income, though some may offer unsecured loans without verifying your income. Secured loan lenders might issue a loan without looking at your income or credit history.
What type of personal loan is easiest to get approved for?
One of the easiest types of personal loan to get approved for is a “no credit check” loan. As the name suggests, these loans offer quick cash to borrowers without requiring a credit check. However, they can have major drawbacks, such as short repayment periods and sky-high interest rates.
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