Requirements for Personal Loans

Credit score and history

Both your credit score and your credit history play a crucial role in determining your eligibility for a personal loan. A low score or bad marks on your credit report may cause lenders to see you as high-risk, which could result in a denied application.

Here are a few things to consider when it comes to evaluating your credit:

Credit score minimums

Most personal loans require a minimum credit score to qualify. The minimum may vary by lender, but in most cases, you’ll need at least a fair or good credit score. A fair score is at least 580, while a good score starts at 670.

Negative items on credit report

If you have negative items on your credit report, such as missed payments, a loan in default, credit card debt or bankruptcy, this can impact your approval for a personal loan. Lenders review your credit report, and negative items may cause lenders to see you as a high-risk borrower.

» FIND OUT: Are bad credit loans a good idea?

Credit score interest rate impact

Lenders will adjust your interest rate and loan terms based on your credit score. In general, a very good credit score (740 or higher) will get you the lowest rates, while a score below 580 can cause your interest rate to be on the higher end of what the lender offers. This can cause your monthly payment to increase, and you’ll pay more interest overall on the loan.

No credit history

While most lenders like to see a solid credit score, there are some that offer loans for borrowers with no credit history. If you haven’t established credit yet, you may still qualify with strong income or by pledging collateral for a secured loan.

Income requirements

When applying for a loan, most lenders require a minimum monthly or annual income. The amount needed will vary based on the loan and lender requirements. Not only do you need enough income to repay the loan, but your income needs to be consistent to prove to lenders that you have the ability to make your payments.

To verify the details on your application, lenders require that you provide proof of income when you apply. This may include two months of pay stubs from your job, a copy of last year’s W-2 or a copy of your most recent tax return.

Lenders consider more than just your job income. If you have other income sources, such as Social Security, alimony or income from investments, you can report that on your application to improve your odds of approval.

Also, it’s a good idea to consider whether you can afford the loan yourself — don’t just rely on the lender to make that call.

According to Leslie Tayne, a financial attorney at Tayne Law Group in Melville, New York, “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.”

Debt-to-income ratio

Your debt-to-income (DTI) ratio is the amount of your monthly gross income that goes toward debt payments. You can calculate your DTI ratio by dividing your monthly debt payments by your monthly gross income.

Calculate your DTI by dividing your total monthly debt payments by your gross monthly income.

For example, if you make $6,250 per month (about $75,000 per year), and your total monthly debt payments are around $2,300, your DTI is about 37%.

This is an important metric for lenders to evaluate whether you can keep up with your current debt payments while adding on a personal loan payment. In general, keeping your DTI below 36% shows lenders that you can afford monthly payments and haven’t taken on too much debt.

If your DTI goes above 43% or higher, lenders may deny you a personal loan because too much of your monthly income goes toward your debt. If this happens, you’ll need to find ways to lower your DTI.

Some ways to lower your DTI include:

• Paying off debts with the highest payment
• Refinancing your debts for lower payments
• Increasing your income
• Negotiating lower payments with your lender

Required documentation

When applying for a personal loan, you’ll need to submit both personal and financial documentation to qualify and complete the application process.

Here is documentation that is typically required:

• Full legal name
• Date of birth
• Email address
• Phone number
• Physical address
• Social Security number or individual taxpayer identification number (ITIN)
• Employment information
• Gross monthly income amount
• List of income sources
• List of debts and payment amounts
• Proof of income (pay stubs, W-2s or tax returns)
• Copy of a utility bill (to verify address)
• Copy of your photo ID and Social Security card

Collateral and secured loans

If you’re applying for a secured personal loan, you’ll be required to pledge collateral to qualify for the loan.

Collateral is something valuable you agree to let the lender take if you don’t repay the loan. If you stop making payments and default on a secured personal loan, your lender has the right to seize your collateral and sell it to recover their costs.

When you apply for a secured loan, you’ll need to sign over the rights to your collateral as part of the loan agreement. Acceptable personal loan collateral may include:

• Boats or RVs
• Cash savings
• Certificates of deposit
• Fine art, antiques or collectibles
• Insurance policies
• Precious metals (gold, platinum, silver, etc.)
• Stocks or bonds
• Valuable jewelry
• Vehicles
• Your home

When you pledge your collateral, your lender will consider the fair market value of the item to approve you for a specific loan amount.

» LEARN: Where to get a secured personal loan