How can I get approved for a personal loan?
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How to get a personal loan
- Check your credit score.
- Take steps to improve your score by checking inaccuracies and paying off debt.
- Decide how much you want to borrow.
- Use lender prequalification to shop around for competitive rates.
- Submit a formal loan application.
5 Personal Loan Requirements To Know Before Applying
Personal loan requirements vary by lender, but there are a few things—such as credit score and income—that financial institutions always look for when reviewing applicants. Before you start shopping for a loan, familiarize yourself with the general qualifications you’ll need to meet and the documents you’ll need to provide. This knowledge can help streamline the application process and improve your chances of qualifying.
Here are five common requirements that financial institutions look for when evaluating loan applications.
1. Credit score and history
An applicant’s credit score is the most important factor a lender considers while evaluating a loan application. Credit scores range from 300 to 850 and are based on factors such as payment history, amount owed, 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.
Lenders impose income requirements on borrowers to ensure they have the means to repay the new loan. Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s minimum annual income requirement is only $20,000. However, don’t be surprised if your lender doesn’t disclose minimum income requirements. Many do not.
Proof of income can 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
The debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that goes toward his monthly debt service. Lenders use the DTI to predict a potential borrower’s ability to make payments on new and existing 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’re applying for a secured personal loan, your lender will require you to pledge a valuable asset—or collateral. In case of loans for home or vehicles, the collateral is usually 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 such as coins or precious metals.
If you fall behind on your payments or default on your loan, the lender can repossess the collateral to recover the remaining loan balance.
5. Origination Fee
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. This fee is usually between 1% and 8% of the total loan amount, depending on factors such as 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 deduct them from the total loan amount disbursed at closing.
Typical personal loan documents
When it comes 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.
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 specific requirements may vary. Generally, however, you will need to provide basic personal information, how much you want to borrow and the purpose of the loan.
The loan application format can also be varied by the lender. While there are numerous online lenders that offer a completely online application experience, others may require you to discuss your application over the phone before making a decision. There are also numerous brick and mortar banks and financial institutions that require applicants to submit a paper application in person.
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 citizen of the United States. This precaution also reduces the risk of identity theft. Acceptable forms of government-issued identification often include:
- Driver’s certificate
- Other ID issued by the state
- Certificate of Citizenship
- birth certificate
- Military ID
Employer and income verification
Lenders want to see that you have the ability to repay your current debt as well as new loans. 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:
- W-2s and 1099s
- Bank statements
- Employer contact information
Prospective borrowers who are self-employed should instead rely on bank statements, 1099 forms and income tax returns.
In addition to confirming your employment, most lenders want to know that you have a stable living situation. This may include 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 that lists your address.
How to qualify for a personal loan Nab
There is no single formula to qualify 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 from lender to lender, our recommendations include:
- Minimum Credit Score 670. Maintaining a credit score of at least 670 will improve your chances of qualifying. However, if you want to receive the most favorable terms, we recommend a minimum score of 720.
- Constant and steady monthly income. Minimum income requirements can vary drastically between lenders, with some having no requirements at all. However, it is important to have at least a steady and stable income to demonstrate that you can afford your monthly payments.
- DTI ratio less than 36%. While some lenders will approve a highly qualified applicant with a ratio of up to 50%, it’s best to aim for a DTI of 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 that you only apply for loans that suit your particular financial situation.
How to get a personal loan Nab
You can often complete personal loan applications online, and a decision can be available as soon as the same day. However, there are a few things you should do before you fill out the application. If you are ready to apply for a personal loan, consider these steps before starting the process:
- Check your credit score
- Take steps to improve your score by checking inaccuracies and paying off debt
- Decide how much you want to borrow
- Use lender prequalification to shop around for competitive rates
- Submit a formal loan application
Related: How do personal loans work?
What should you do if you are rejected?
Lenders can reject 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’re asked to borrow more money than the bank thinks you can afford, depending on factors such as income, employment stability and other outstanding debts.
If a lender rejects your personal loan application, there are some 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 errors or inaccuracies
- Improve your credit score by paying off your current outstanding debts
- Check your credit report for errors
- Increase your income
- Compare lender requirements
- Apply for a small loan amount
- Consider using a co-signer