Personal Loan Requirements To Know Before Applying

Personal Loan Requirements To Know Before Applying

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

The applicant's credit score is one of the most crucial aspects that a lender takes into account when evaluating a loan application.Credit scores are based on things like payment history, the amount of debt that is still owed, and how long you have had credit. They range from 300 to 850.Although some lenders will lend to applicants with no credit history at all, many lenders require applicants to have a minimum score of approximately 600 to qualify.

2. Income

Banks force pay prerequisites on borrowers to guarantee they possess the ability to reimburse another credit. Lenders have different minimum income requirements. For instance, SOFIC requires a minimum annual salary of $45,000;The minimum annual income for Avant is just $20,000.However, if your lender does not disclose minimum income requirements, do not be surprised. Most do not. Proof of pay might incorporate ongoing assessment forms, month to month bank explanations, pay nails and marked letters from businesses; Tax returns or bank deposits can be provided by self-employed applicants.

3. Debt-to-income Ratio

The debt-to-income ratio (DTI) is a percentage that indicates how much of a borrower's gross monthly income is used for debt service each month. DTI is a tool that lenders use to predict a potential borrower's capacity to make payments on both new and existing debt. Consequently, a DTI of less than 36 percent is ideal, though some lenders will approve highly qualified applicants with ratios as high as 50 percent.

4. Collateral

Your lender will require you to pledge valuable assets as collateral if you apply for a secured personal loan. The collateral typically relates to the loan's underlying purpose in the case of automobile or home loans. However, other valuable assets, such as cash accounts, investment accounts, real estate, and collectibles like coins or precious metals, can also be used as collateral for secured personal loans. The lender has the right to take back the collateral in order to recover the remaining loan balance in the event that you default on your payments or default on your loan.

5. Origination Fee

Although not part of the qualification process, many lenders charge borrowers for the processing of applications, conducting credit checks, and closing of personal loans. Depending on the applicant's credit score and loan amount, these fees typically range from one percent to eight percent of the total amount of the loan. Origination fees may be financed as part of the loan amount or deducted from the total loan amount at closing by some lenders while others finance them as cash at closing.

Typical Personal Loan Documents

Common Documents Required for a Personal Loan When it comes time to submit an official application for a personal loan, your lender will request a number of documents to verify your identity, residence, and employment. The most frequently requested documents for personal loan applications are listed here.

Loan Application

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

Passport

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:

Paystubs

returns

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.

Prequalifying for Personal Loan

Prequalifying for a personal loan lets you see the interest rates and terms you may receive and be eligible for when you apply. However, these are not guaranteed until you submit a formal application.

During prequalification, the lender typically only runs a soft credit check, which has no impact on your credit score. Once you submit the full application, however, they will run a hard credit check, which slightly but temporarily drops your score.

While your prequalification offer isn’t set in stone until you formally apply, it’s a handy way to compare potential options from multiple lenders to find the best loan for your situation.