Personal loan requirements vary by lender, but there are a few considerations—like credit score and income—that financial institutions always look at when reviewing applicants. Before you start shopping for a loan, familiarize yourself with the common qualifications you’ll need to meet and the documentation you’ll need to provide. This knowledge can help streamline the application process and may improve your chances of qualifying.
Here are five common requirements that financial institutions look at when evaluating loan applications.
1. Credit Score and History
An applicant’s credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors like payment history, amount of outstanding debt 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 at all.
Lenders impose income requirements on borrowers to ensure they have the means to repay a new loan. Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.
Evidence of income may 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
Debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that goes toward her monthly debt service. Lenders use DTI to predict a prospective borrower’s ability to make payments on new and current debt. For that reason, a DTI less than 36% is ideal, though some lenders will approve a highly qualified applicant with a ratio up to 50%.
If you’re applying for a secured personal loan, your lender will require you to pledge valuable assets—or collateral. In the case of loans for homes or vehicles, the collateral is typically 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 like coins or precious metals.
If you fall behind on your payments or default on your loan, the lender can repossess the collateral to recoup the remaining loan balance.
5. Origination Fee
Though not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, running credit checks and closing. These fees usually range between 1% and 8% of the total loan amount, depending on factors like 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 subtract them from the total loan amount disbursed at closing.
Typical Personal Loan Documents
When it’s 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 the specific requirements may vary. In general, though, you’ll need to provide basic personal information, how much you want to borrow and the purpose of the loan.
The format of a loan application may also vary by lender. While there are numerous online lenders that offer a completely online application experience, others may need to discuss your application over the phone before providing a decision. There are also a number of 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 United States citizen. This precaution also reduces the threat of identity theft. Acceptable forms of government-issued identification often include:
- Driver’s license
- Other state-issued ID
- Certificate of citizenship
- Birth certificate
- Military ID
Employer and Income Verification
A lender wants to see that you have the ability to pay back your current debts as well as the new loan. 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 must instead rely on bank statements, 1099 forms and income tax returns.
Proof of Address
In addition to confirming your employment, most lenders want to know that you have a stable living situation. This may involve providing proof of your address, including a recent utility bill, a copy of your lease or other rental agreement, voter registration card or proof of home, rental or auto insurance that lists your address.
How to Qualify for a Personal Loan
There is no one formula to qualifying 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 for each lender, our recommendations include:
- Minimum credit score of 670. Maintaining a credit score of at least 670 will improve your chances of qualification. However, if you want to receive the most favorable terms, we recommend a minimum score of 720.
- Consistent and steady monthly income. Minimum income requirements may vary drastically between lenders, with some having no requirements. However, it’s crucial to have consistent and steady income at the minimum to demonstrate you can afford your monthly payments.
- DTI ratio less than 36%. While some lenders will approve a highly qualified applicant with a ratio up to 50%, it’s best to aim for a DTI that’s 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 you only apply for loans that fit your specific financial situation.
How to Get a Personal Loan
You can often complete personal loan applications online, and a decision may be available as soon as the same day. However, there are a few things you should do before you even fill out the application. If you’re ready to apply for a personal loan, consider these steps before beginning the process:
- Check your credit score
- Take steps to improve your score by checking for inaccuracies and paying down 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’re Denied?
A lender can deny your personal loan application for a number of reasons. Your credit score may be too low or your DTI could be too high. It’s also possible that you asked to borrow more money than the bank thinks you can repay based on factors like income, employment stability and other outstanding debts.
If a lender denies your personal loan application, there are a few 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 mistakes or inaccuracies
- Improve your credit score by paying down your current outstanding debts
- Check for mistakes on your credit report
- Increase your income
- Compare lender requirements
- Apply for a smaller loan amount
- Consider using a co-signer