When you’re applying for a personal loan, your lender wants to be confident you can pay it back. That’s why a lender might require you to meet credit, income or other standards before approving your application.
“The requirements are put in place by the lenders to possibly decrease or totally eliminate the risks they are taking by lending money,” says Ohan Kayikchyan, certified financial planner and financial coach. “The lenders are expecting you to pay your debt obligation back to them according to the loan agreement and its terms.”
Here’s what you should know about the requirements you may need to meet for a personal loan.
Common Personal Loan Requirements
Here are six things you can expect lenders to ask about on your loan application. Some may vary by institution, but it is important to ensure all are in order before you request money.
Credit Score and Payment History
A positive credit history and a high credit score demonstrate to lenders that you are a reliable consumer who pays back your debts. “Some lenders will require a certain number of years of credit history,” says Kyle Enright, president of Achieve Loans. “At my company, for example, we require at least two years of credit history.”
If you have a history of late or missed payments, that might signify you are too risky for a loan. In that case, you could receive a high interest rate or even have your application denied, says Enright.
Income and Employment
You’ll need to make a certain amount of money per year to be eligible for a loan with some lenders. For instance, Discover requires that a household make at least $25,000 per year to qualify for a personal loan. Most lenders will require proof of employment to verify you have a steady paycheck to use toward payments.
However, even if a lender has no income requirement, be sure you aren’t borrowing more than you can pay off with your current salary.
The amount of money you owe in monthly debt payments compared with your monthly gross income is known as your debt-to-income ratio. “The lower the number, the better the chances to get approved,” says Kayikchyan.
According to Enright, debt-to-income requirements may vary by lender. “At Achieve, we look for a debt-to-income ratio of 45% or lower,” he says.
“From cash savings to cars, houses or any other asset that holds value usually can serve as collateral,” says Kayikchyan. “As secured personal loans are backed by collateral, they present less risk for the lender. Because of that, the qualification process for the secured loan is usually easier, plus the interest rates are lower in comparison to unsecured personal loans.”
You’ll want to be sure you can pay back any money you borrow if you take out a secured personal loan. If you can’t, you may lose the home or car you used as collateral.
You could be required to pay an origination fee to take out a personal loan. This is the flat fee many lenders charge to cover the administrative costs of the loan, so make sure you have the funds to cover these costs.
“Prospective personal loan borrowers should know that loans generally have origination fees,” says Enright. “They can vary, often from about 2% to 7% of the loan amount. Some lenders charge late fees and/or early repayment fees, as well.”
Considering the average personal loan debt is about $10,750, according to TransUnion, these fees can add up quickly.
Kayikchyan advises that borrowers carefully read their loan agreement, or the contract presented to you when you request a personal loan, before signing.
Documents Verifying Identity and Address
Finally, you should ensure you have all of the proper documentation with you before you fill out a personal loan application. This can include your government-issued ID and proof of address, such as a utility bill or lease agreement.
How to Get a Personal Loan
The first step in applying for a personal loan should always be to research your options and compare rates. Many lenders offer prequalification tools so you can get an idea of the interest rate and terms you might be approved for before triggering a hard pull on your credit. Armed with this information – and the fees, documentation and collateral (if you’re applying for a secured loan) – you can apply.
“While personal loan requirements vary from one lender to another, almost all lenders have similar processes,” says Kayikchyan. “Lenders check your credit score, including payment history. They calculate your total debt-to-income ratio and check if your income is sufficient to pay back the loan. You can go to a bank to apply for a loan, or you can submit the loan application online.”
The first step is collecting personal information, including documentation showing your employment and income. You’ll also need to provide information about your monthly debt obligations, such as rent or mortgage, student loan, and credit card payments. This will be used to calculate your debt-to-income ratio.
From there, the lender will pull or request any additional information needed to make a decision, including your credit history. Be sure to ask if this process requires a hard pull on your credit, so you know whether your score will be affected.
Once all the information is collected, your lender will calculate the amount, interest rate and other terms you qualify for. The higher your credit score and lower your debt-to-income ratio, the better your terms will typically be.
Still, there are options to boost your chances of securing the loan and terms you want.
“Having a relationship with the financial institution also increases your chance of not only getting a loan, but possibly getting a lower rate,” advises Laura Sterling, vice president of marketing at Georgia’s Own Credit Union. “If you are planning on taking out a personal loan in the future, it’s a good idea to open an account (and possibly secondary accounts) now to establish a credit history with that financial institution.”
You might also be able to boost your chances of approval by using a co-signer, says Enright. Just keep in mind that not all lenders allow this practice, so you should check before counting on it for your eligibility.
Once you’re approved, personal loan funds are issued via a check, direct deposit or direct payment to a creditor.
Loan amounts and repayment terms vary widely by lender. According to Enright, you could see loans between $5,000 and $50,000 and repayment terms between two and five years.
Should You Take Out a Personal Loan?
Personal loans can be a great tool for securing moderate amounts of money when you need it, whether to cover an unexpected expense or finance a project. Just ensure your credit, debt-to-income ratio and other factors are in a good place before you apply, so you can better your chances of being approved with good terms.