Requirements for personal loans

A personal loan is a credit agreement between a borrower and a lender. A borrower is given an amount of money to be repaid with interest during a certain period. You can use personal loans for many expenses, including medical bills, debt consolidation, weddings and home remodeling.

However, some lenders will set restrictions on personal loan use. For example, a lender might decide you cannot use its personal loan for higher education costs. So check with your lender to ensure that your personal loan covers what you need.

You can secure personal loans for $500 to $50,000 with annual percentage rates (APRs) ranging from about 5.99% to 36%. Your creditworthiness, income and other factors will determine how much money you can borrow and your interest rate for that loan.

Key insights

• Personal loans typically have lower APRs than credit cards, making them a good choice for credit card debt consolidation.
• Personal loans can be used for debt, emergencies, home repairs, weddings and vacations.
• Personal loans typically cannot be used for college tuition or down payments.

What to consider before applying for a personal loan

A personal loan can help you achieve your short-term and long-term financial goals when used correctly. But, be warned. If you don’t manage your loan properly, it can also drive you deeper into debt. Deliberately think through these factors before applying for a loan:

Do I need this loan?

Suppose you need this loan to cover emergencies, such as a huge medical bill or vet expenses. In that case, a personal loan can be more affordable than putting the debt onto a high-interest credit card.

On the other hand, a personal loan for non-urgent needs, such as the desire to remodel your kitchen, can hurt your finances, especially if your monthly budget already feels tight. In this case, it might be better to wait and save the money for the project instead of going into debt.

Can I afford it?

You'll want to ensure the math works out when you take out a personal loan. Using a personal loan to pay off high-interest credit cards can help you save money each month. But getting a personal loan might not be in your best interest financially. First, check to see that you can afford the payments and that the interest rates are reasonable. If your minimum monthly payment doesn't cover the principal and interest, you're better off finding alternative funding.

According to Leslie Tayne, a financial attorney at Tayne Law Group, “If you’re living paycheck to paycheck and secure a personal loan to give yourself a cash cushion, you may feel temporary relief. However, your loan payment will strain your already tight budget. Plus, you’ll still need to address the underlying cause of your financial situation: underearning, overspending or both."

Factors affecting your personal loan application

Lenders want to work with borrowers who are not risky; you prove you are not risky by establishing financial security. All lenders will have different minimum requirements, but ideally, you want to apply for a personal loan with good credit and low debt to get the best interest rates.

To get the best interest rates, ensure you have a high credit score and a low debt-to-income ratio.

Here’s what lenders will be looking at:

1. Credit score: Many lenders require a credit score of at least 600, though some lenders will want to see a higher score before approval. Anything under 670 is considered fair or poor credit, and you will only have access to high-interest rates.
2. Debt-to-income (DTI) ratio: This ratio is determined by the amount of income that goes toward debt repayments monthly. Ideally, lenders want to see that your DTI ratio is 36% or lower.
3. Income level: Lenders don’t typically disclose a minimum income level. Consider calling a lender to inquire if your income is sufficient before applying.

» MORE: What is a good credit score?

Documents required for a personal loan

Gathering all information you need for your personal loan before applying will save you time during the loan application process. Here’s what most lenders will ask to see:

To ensure a timely application process, make sure you have all documentation on hand

Identification: Have two government-issued forms of identification, one of which is a photo ID. Acceptable documents include a driver’s license, birth certificate, passport, Social Security card and military ID. Always send copies and not the originals.

Income verification: Prepare to submit tax documents, pay stubs, W-2s/1099s or bank statements. A lender might ask for one or two of these documents rather than all of them.

Proof of address: Your driver’s license is usually not enough proof. You will need to submit an additional utility bill, mortgage statement or credit card/bank statement with your name and address on it.

» MORE: Guide to getting a personal loan with a co-signer

Bottom line

Personal loans are easy to get if you have good credit, steady employment and a low amount of debt. You’ll need to have all your documents in order and meet the lender’s minimum qualifications to be accepted for a personal loan.

Make sure you think through the potential ramifications of a personal loan before applying for one because you want to avoid getting in over your head financially. Taking on too much debt for a short-term gain could cause long-term problems. Accepting a personal loan will affect your budget, so make sure you’re ready for those changes before applying.