Personal Loan Requirements Explained
Life often is unpredictable, so when you need to pay unexpected bills such as home repairs, medical expenses or wedding costs, a personal loan can bridge that gap in your finances. However, you’ll need to meet the lender’s requirements to get a personal loan. Here’s a look at what you can expect a lender to require from you to approve a personal loan.
Key Takeaways:
- A personal loan is a common way to borrow money, usually with a fixed interest rate and repayment term.
- An unsecured personal loan will have a higher interest rate than you’ll get if you put up collateral for your loan.
- Eligibility requirements for personal loans vary depending on the lender, though you’ll typically need a credit score of at least 580 and a debt-to-income ratio that does not exceed 50%.
Requirements For A Personal Loan
Your eligibility for a personal loan will depend mainly on certain aspects of your financial situation. Here are some of the factors lenders consider before approving your loan.
1. Credit Score
Most lenders will require you to have at least fair to good credit to get a personal loan. A credit score that’s between 580 and 669 is considered fair, while a score between 670 and 739 is considered good. If your credit score is below 580, you may have trouble getting a personal loan. Personal loans for borrowers with bad credit often require borrowers to pay higher fees and interest rates. That means you’ll also have to cover higher monthly payments.
2. Proof Of Income
Lenders want to verify that you have enough income to repay your loan. The minimum income requirement will vary by lender and loan amount. Some lenders disclose their income requirements, while others do not. You can expect your lender to ask for your recent pay stubs, bank statements, tax returns, information about your employer, and gross monthly income.
3. Debt-To-Income Ratio
Lenders measure your ability to repay your loan by calculating your debt-to-income ratio, which shows how much of your income is needed to pay your debts. To calculate your DTI, add up your monthly debt payments, such as credit cards, student loans and your mortgage or rent payment, and divide by your gross monthly income. Multiply the result by 100 to get a percentage.
For example, you earn $6,000 per month before taxes, your mortgage is $1,800, your credit card bill is $400, and you pay $200 per month on other debts. That means your monthly debt payments total $2,400.
$2,400 / $6,000 = 0.4 = 40%
The exact DTI ratio requirements vary by lender. Some lenders require that your DTI ratio remain below 36%, while others allow a DTI ratio of up to 50%.
4. Sufficient Collateral
A personal loan can be secured or unsecured. An unsecured loan requires no collateral and is riskier for the lender. That means you can expect to pay a higher interest rate. A secured loan means you pledge an asset as collateral, often a vehicle or property. If you default on the loan, the lender can seize that asset to compensate for its losses. A secured loan reduces the lender’s risk and allows you to borrow more money and score a lower interest rate. Collateral for a secured personal loan can include savings accounts, investment accounts or any valuable possessions.
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Gathering Your Documents For A Personal Loan
Your lender will ask you to document your finances. Gathering this paperwork in advance can expedite the process. Here are some documents you may need:
- Loan application
- Identification
- Recent pay stubs
- W-2 or 1099 forms
- Income tax returns
- Bank account statements
- Investment account statements
- Retirement account statements
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Tips For Applying For A Personal Loan
If you think a personal loan is the right financing move for you, here are some tips on getting one.
1. Decide On A Loan Amount
The first step is figuring out how much to borrow. This will depend on what you need and how much monthly payment you can afford. Most lenders offer personal loans to $50,000. The amount you can borrow will depend on factors such as your credit score and DTI ratio.
2. Get Prequalified
When you prequalify for a personal loan, the lender will tell you how much it expects you could borrow, the interest rate you can expect to pay, the loan term and the estimated monthly payment. It’s a good idea to get prequalified with several lenders so you can compare offers and pick the best deal. Lenders typically soft-check your credit when prequalifying you, which won’t affect your credit score.
3. Expect To Pay An Origination Fee
You usually have to pay an origination fee to get a personal loan. Lenders charge this fee to cover the cost of processing your loan application and verifying your finances. The origination fee is expressed as a percentage of the total loan amount and typically ranges from 1% to 8%. The cost of the origination fee will depend on the lender, loan amount and your credit score. For example, a borrower with good credit might get charged a 1% origination fee, while a borrower with poor credit might get charged a 6% fee.
4. Consider A Co-Signer
If you think you might have difficulty getting a personal loan, a co-signer can improve your chances. A co-signer agrees to take responsibility for the loan if you fail to repay it. This reduces the lender’s risk and can help you borrow more money and get a lower interest rate. However, the co-signer must understand that they’re putting their own money and credit on the line.
5. Understand The Rate And Terms
Before closing on a personal loan, it’s important you understand the rate and terms. The interest rate is how much you pay to borrow the money and is expressed as a percentage. Interest rates for personal loans can vary from 8% to 36%, depending on market conditions and your credit history. The term is the length of time you have to pay off the loan. Personal loan repayment terms typically range from one to seven years, though some can be shorter.
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FAQ
Here are answers to some common questions about personal loan requirements.
The Bottom Line
A personal loan can be a helpful financing solution if you need to borrow money. To qualify for a personal loan, you’ll need to meet eligibility requirements set by your lender. You’ll typically need fair to good credit, sufficient income, and a DTI ratio that isn’t too high to get approved. Exact eligibility criteria will vary depending on the lender.
