You can use a personal loan for a range of purposes, such as to cover emergency expenses or to consolidate high-interest debt. While personal loan requirements vary by lender and loan amount, you typically need a good credit score and reliable income to qualify.
Understanding common personal loan qualifications can help you improve your chances of approval, helping you secure better rates and terms.
Before starting the application process, familiarize yourself with how to qualify for a personal loan. While every lender is different, most base personal loan eligibility on the following factors:
1. Credit score and history
Your credit score is one of the most important factors lenders consider when determining your eligibility for a personal loan. A lower credit score suggests you might be a risky borrower. Lenders protect themselves from this risk by increasing interest rates and shortening terms, reserving the most competitive offers for those with excellent credit.
Since your payment history makes up 35% of your FICO Score, a solid track record of making on-time payments will increase your odds of getting approved. Missing payments could impact your credit, with a single late payment remaining on your credit report for up to seven years.
Some lenders also require several years of credit history to qualify for a personal loan.
Don’t know your credit score? Sign up at LendingTree Spring to get your free credit score and recommendations to boost your score.
How credit scores affect APR rates
Increasing your credit score could help you secure lower rates with more flexible terms. Here’s a quick look at how average rates can differ by credit score range based on recent LendingTree personal loan statistics:
- 720 and higher: 14.80%
- 680-719: 23.48%
- 660-679: 32.06%
- 640-659: 45.00%
- 620-639: 58.69%
- 580-619: 89.33%
- 560-579: 127.20%
- Under 560: 165.66%
2. Income
Lenders typically require a specific monthly or annual income to ensure you can make loan payments. Proof of income could include paycheck stubs, tax returns, disability benefits statements, alimony and Social Security payments.
If you don’t make enough to qualify for a personal loan, consider starting a side hustle to bring in more cash.
3. Debt-to-income ratio
Your debt-to-income (DTI) ratio shows lenders how much of your monthly income goes toward your current debts. DTI is important since it reassures the lender that you have enough income after paying your essential bills to cover your personal loan payment.
While it’s generally recommended to keep your DTI ratio below 43%, most lenders prefer ratios of 35% or lower.
How to calculate your DTI ratio
To calculate your DTI, add up all of your minimum monthly payments and divide this amount by your gross monthly income.Let’s say your monthly bills total $2,250 and you earn $6,000 gross per month. Here’s how that would look:$2,150 ÷ $6,000 = 35% DTI ratio
4. Collateral
Secured personal loans require collateral to help reduce lender risk. Typical forms of collateral can include physical assets like real estate, vehicles or jewelry, or financial assets like cash accounts, investment portfolios or certificates of deposit. If you fail to repay the debt, the lender can seize the collateral to cover the remaining balance.
Borrowers unable to provide collateral can consider unsecured personal loans. However, these loans tend to come with higher rates.
Documents needed for a personal loan
Lenders typically require documentation to verify your information when going through the personal loan process. While the exact paperwork will vary by lender, here are some common documents you can expect to provide:
- A loan application: The first step in getting a personal loan is to submit an application to a lender. This form should include your personal information, the reason for your loan, credit score and income. Note: Even if you prequalified for a personal loan with a specific lender, you will still need to submit an official application.
- Personal identification: You may need to provide government-issued IDs, such as your driver’s license, birth certificate or passport, as well as your Social Security number.
- Proof of address: Even if you sign up for electronic bills, your lender may still need to verify your physical address with a copy of your lease or a utility bill.
- Proof of income: Your lender will likely ask for income verification, such as W-2s, pay stubs or tax returns.
Even if you meet personal loan eligibility requirements, there may be better choices than taking on this form of debt. Here are some important questions to consider before signing the dotted line.
Do I actually need a personal loan?
While a personal loan can help during times of financial hardship, other low-cost options might be a better fit for your situation. For instance, a 0% intro APR credit card could pause your interest for up to 21 months, helping you save hundreds of dollars on balance transfers and new purchases. However, you’re likely to save more on personal loans versus credit cards over the long run since credit card rates tend to run significantly higher.
If you’re juggling a mountain of debt, a debt consolidation loan or credit card refinancingcould help. Not only can consolidating help you secure a lower rate, but it can simplify your life by having only one loan payment to pay each month.
Do I understand the rates and fees?
Not all loan offers are easy to understand. Here are some factors to consider when deciding if a personal loan is the best move for you.
- Fixed vs. variable interest rates: Variable interest rates fluctuate throughout the loan’s duration, while fixed rates remain unchanged. Even though a low variable rate seems like a better deal, it’s generally best to stick with a fixed rate for predictable payments.
- Origination fees: Some personal loans charge a one-time origination fee, ranging from 1% to 12% of the loan’s principal. Consider one of our top picks for personal loans with no origination fees to save on extra fees.
- Prepayment penalties: Prepayment penalties help lenders recover money lost on interest if you repay your debt early. The fee could be based on a specific period of interest charges, such as what you’d pay over 12 months, or a percentage of the remaining balance. Prepayment penalties don’t typically come with personal loans, but it’s a good idea to check with your lender if you want to pay your loan off early.
Can I afford the monthly payments?
Even if you qualify for a personal loan, you want to ensure the monthly payments won’t be a stretch for your budget. Use the personal loan calculator below to crunch the numbers and estimate your payments. If possible, try to borrow a low amount to help you stay on track with payments since defaulting on a loan can drastically affect your credit score.
How to qualify for a personal loan
While every lender will have its own guidelines and requirements, there are a few steps you can take to strengthen your personal loan application.
- Improve your credit score: A good credit score of 670 or higher can help you unlock better rates and terms. While some lenders extend credit to borrowers with scores as low as 300, you will typically pay higher fees and more interest over the life of the loan. Improving your credit score before applying can help you save more.
- Lower your DTI: Lenders may view a high DTI ratio as your budget being stretched too thin. To offset this, work on increasing your income and aggressively paying off old debt.
- Add a cosigner: Applying with a creditworthy cosigner can help reduce lender risk and increase the chances of securing a better rate. You can search for lenders providing personal loans with cosigners. Just make sure your cosigner knows the legal responsibility of cosigning a loan.
- Provide collateral: You could leverage assets like a car or investment account for lower loan rates and more flexible repayment terms. However, compare the differences between unsecured versus secured personal loans to ensure you pick the right option for your situation. With collateralized loans, you risk losing your assets if you fail to repay the debt.
Here are five steps to get a personal loan that fits your needs.
1. Decide how much you want to borrow
Review your current bills and calculate how much funding you need. Consider borrowing a smaller amount to make it easy to keep up with the payment schedule. Once you establish a history of on-time payments, you could consider borrowing more down the road.
2. Review your credit score and credit report
You can check your credit score for free with LendingTree Spring — without impacting your credit. While credit scores range from 300 to 850, the minimum credit score for a personal loan is typically 580. However, borrowers with scores of 640 or higher tend to get better loan rates and terms.
You can also access your free credit report once per year at AnnualCreditReport.com. Keep the following factors in mind as you review your credit report:
- Payment history
- Amounts owed
- Length of credit history
- Credit mix
- New credit
3. Shop lenders for prequalified offers
Many lenders offer a prequalification process, which involves a soft credit check so the lender can review your credit history. Unlike with official loan applications, prequalification doesn’t hurt your credit score.
It’s worth gathering multiple prequalification offers to compare estimated APRs and repayment terms to find the best personal loan option for you.
However, the rates and terms listed on the prequalification offer are just an estimate — you must submit an official application to see your final offer.
4. Gather documents
Review the lender’s website for a detailed list of required documents and paperwork, such as acceptable forms of identification and proof of employment. Gathering these documents in advance can speed up the application process to help you get your funds quickly.
5. Apply for a personal loan
The official loan application process requires submitting an online or in-person application along with any required documents for verification. This stage differs from prequalification and requires a hard credit check, which will likely temporarily cause your credit score to drop by a few points.
Review the personal loan agreement before signing to make sure you understand the rates, terms and fees. If any part is confusing, ask the lender for clarification.
Typically, the lender will deposit your personal loan funds directly into your bank account one to three days after closing, although some lenders might take longer. You can then use the loan proceeds for any expense.
What to do if you’re denied for a personal loan
There are many reasons why a lender could deny a personal loan application, such as a low credit score or a high DTI ratio. Or you might have requested to borrow more money than the lender thinks you can responsibly handle based on your income and other financial obligations.
If your personal loan application was denied, here are a few steps you can take to increase your chances of getting approved in the future:
Ask why your application was rejected.
Under the Equal Credit Opportunity Act, lenders must explain why your loan application was denied. Use this information to focus on areas that need improvement, such as if you recently opened too many credit cards or your credit history needs more time to be established.
Review your credit report for mistakes and errors.
Mistakes and fraudulent activity can happen, causing a dent in your credit score. As a result, lenders may feel cautious to work with you. You can fix this by submitting a credit report dispute to the credit reporting agency.
Improve your DTI by paying off old debt.
If you have a high DTI ratio, lenders may believe you cannot afford the loan. You can use tactics such as the debt avalanche and debt snowball methods to pay off old debt. Also, take a look at your credit utilization ratio. A lender could deny your application if you have a lot of maxed-out credit cards.
Increase your income.
Lenders want to feel reassured that you can repay the debt. If you can find ways to earn extra cash, you will likely be eligible for more funding options.
Seek a smaller loan amount.
Some lenders may not be willing to work with you if you’re looking for a large loan but have a low income or poor credit score. Consider applying for a small personal loan to see if that improves your chances.
Consider alternative financing options.
If you struggle to get approved for a personal loan, you can consider the following options:
- Personal credit card: Credit cards are typically easier to qualify for than personal loans and can even earn you bonuses and rewards. However, you should follow credit card best practices like keeping your balances low and always paying your bill on time to maintain a positive credit profile.
- HELOC: A home equity line of credit (HELOC) is similar to a credit card — you can withdraw money up to your set limit as often as needed, only paying on the amounts you use. However, you risk losing your home if you can’t repay the debt.
- Peer-to-peer funding: With peer-to-peer loans, you connect with an individual investor via a lending platform. Similar to traditional loans, you receive the funds as a lump sum and make fixed interest payments.
