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Personal Loans

What are the requirements for a personal loan?

By
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edited by
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Updated July 19, 2023, 9:37 a.m. ET
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If you’re facing financial hardship or a large expense, taking out a personal loan can help you get the funds you need. But you must meet certain requirements before you can take out the loan, such as a low debt-to-income ratio and a positive payment history. Here are some common requirements.

A low debt-to-income ratio

Your debt-to-income ratio (DTI) is your monthly debt payments compared to your gross monthly income. It plays a critical role in qualifying for a personal loan because it gives lenders insight into whether or not you can afford more debt. That is, if you have a high DTI, you’re likely spending a large portion of your income on debt already and may not be able to budget for more. If your DTI is low, you can likely afford to fit a monthly loan payment into your budget. 

To figure out your DTI, divide your monthly debt burden by your gross monthly income. You can turn the result into a percentage by multiplying it by 100. Here’s an example, assuming a debt burden of $1,200 and a monthly income of $4,000:

(1,200 / 4,000) x 100 = 30%

Most lenders prefer a DTI below 35% or 36%, so in this example, a lender would be more likely to offer a better rate.

However, each lender will have different DTI requirements. For example, Upstart has a DTI maximum of 45% for those living in Connecticut, Maryland, New York, or Vermont and 50% for all other states. 

A good credit score

Lenders pay close attention to your credit score when considering your application. This is because your credit score is a reflection of your previous lending history and habits, which gives them a good understanding of how you’re likely to treat their loan. The higher your credit score, the more attractive of a borrower you are. If your credit score is low, lenders are less likely to approve your loan. 

Generally, lenders consider a credit score of 670 or higher to be good for personal loans. However, credit score requirements vary between lenders. For example, Axos Bank has a credit score minimum of 700, while Happy Money requires a minimum of 640. 

Proof of a steady income

Lenders often require you to submit proof of income to demonstrate that you have the resources to pay back your loan. By proving that you have a reliable income, you’ll help lenders see you as a worthy borrower. 

Besides proving your income, you’ll also need to show that you can reasonably afford monthly loan payments. Personal loans usually come with fixed monthly payments, which you’ll be responsible for repaying over the loan term. 

Since your term determines the affordability of your monthly payments, you’ll want to be sure to apply for a loan term that fits your budget. Shorter loan terms will have higher payments, while longer terms will have smaller payments. Here’s an example: 

A $10,000 personal loan with a 5-year term and an 8.00% interest rate might have monthly payments of around $203. However, the same loan amount and interest rate with a 1-year term would result in payments of $870. 

Keep in mind that while longer loan terms have lower monthly payments, you’ll pay more in interest over the life of the loan.

Positive payment history

Lenders turn to your payment history to find out how responsible you are with your debt. A positive payment history signifies to lenders that you’re trustworthy with debt and are likely to pay back your loan. Bad payment history will throw up red flags and could result in your loan application being denied. 

To figure out how responsible you are with your debt, lenders look to your credit report. During their review, they will pay close attention to your history of late payments, defaults, and delinquencies, as well as how consistent you are at making payments on time. 

What if you don’t meet the requirements?

If you don’t meet the requirements to take out a personal loan, you have other options. To improve your chances of qualifying, try these tips:

  • Consider a cosigner: If you have a trusted family member or friend with a good credit score, some lenders will allow them to cosign your loan. As a cosigner, they will be responsible should you fail to pay it back.
  • Increase your income: Increasing your income can help show lenders that you can afford your loan, and it’ll lower your DTI. 
  • Improve your credit score: Improving your credit score can increase your chances of approval and help potential lenders view you as less of a risk. 
  • Find a different lender: Different lenders have different requirements, so while you might not qualify with one lender, you could still qualify with others. 

How to apply for a personal loan

Applying for a personal loan is a fairly straightforward process. Although it can vary slightly from lender to lender, here’s what you should expect: 

  1. Determine your loan amount: Calculate how much money you need to borrow. You’ll want to stick to this loan amount when deciding on a lender and avoid getting tempted by larger loan limits.
  2. Compare lenders: With online marketplaces, you can compare lenders side by side based on loan rates, terms, requirements, and more.
  3. Complete the application: Most personal loan lenders allow you to apply online. On the application, you’ll be asked to provide your personal and financial information, plus any documents needed to verify it. 
  4. Approval and disbursement: After you complete your application, you’ll need to wait for your loan to be approved. Approval can happen rather quickly — often within one business day — but the timeline depends on the lender and how quickly they can verify the information you provided. Once approved, your lender will disburse the loan, giving you access to the funds. 

How to choose the best lender

To choose the best personal loan lender, you’ll want to shop around for the best rates and terms. When comparing lenders, you should pay special attention to the following factors: 

  • Interest rates: Interest rates play a huge role in the overall cost of your loan, and even the smallest difference in rates can affect the cost of borrowing.
  • Loan terms: Your loan term is the amount of time you’ll have to repay your loan, which can impact your monthly payment. The right lender for you will offer loan terms that work with your financial goals and budget.
  • Loan amount: Loan minimum and maximum amounts vary, so you’ll need to make sure that potential lenders can accommodate your loan amount. 
  • Fees: Personal loans often come with fees, like origination fees and prepayment penalties. Look for lenders that have few (or no) fees.
  • Reputation and customer service: You should research lenders’ reputations, including their customer service quality, to ensure that you choose a lender that works to meet your needs. 
  • Eligibility: Each lender will have their own set of eligibility requirements. You’ll want to consider whether or not you can meet these eligibility requirements before applying for a loan through a specific lender. 

FAQ

Do personal loans require collateral?

In general, personal loans don’t require collateral. Most personal loans are considered unsecured loans and are granted based on factors like your credit and DTI. However, a secured personal loan requires collateral, such as your home or your car.

Do personal loans have fees?

Yes, personal loans often come with fees, such as origination fees, late payment fees, and prepayment penalties. However, you’ll need to check with your specific lender to find out what fees, if any, you’re responsible for paying.