Personal Loan Eligibility Requirements: Things to Know Before Applying

If you’re going to get a personal loan, there are multiple things you need to consider prior to applying. Before you start to compare offers and opt for better loan terms, it’s crucial to understand whether you meet personal loan eligibility requirements.

Although there’s no unified list of qualification criteria all lenders check with during the decision-making process, there are still some common factors they all consider. Most personal loan providers look far beyond just your credit score, payment history, and income when determining your creditworthiness. Let’s take a closer look at key factors that affect your loan eligibility.

What Are Common Personal Loan Requirements?

Even though personal loan lenders pay attention to the same parameters, they may still have different passing levels. For example, most loan providers will consider your credit score as a determining factor. At the same time, one lender will require you to have a rating of at least 670, while another can approve you even with a 620 score. Below are some common personal loan requirements that lenders usually look at.

Credit Score

A credit score serves as a numerical representation of your overall financial behavior. There are different scoring models major credit bureaus use when calculating your credit score, but commonly, your rating can range from 300 to 850. The higher your credit score, the better interest rate and loan terms you can expect to get.

Debt-to-Income Ratio

Your debt-to-income ratio shows a lender how much debt you carry each month compared to your monthly gross income. If the ratio is high, it indicates that you have already put most of your earnings toward paying off your existing debts. Thus, a lender may decide you’re living on the edge and avoid lending you high loan amounts at low interest rates.

Income

Your income plays an important role in determining your personal loan eligibility. Even if you have good credit, a lender will assess the amount you earn on a monthly basis to make sure you can afford to repay the loan. As each loan provider wants to get their money back from you, they are most likely to turn down your loan application if the amount that remains on your hand after making your regular monthly payments is not enough to cover your potential loan payment.

Having a steady income can be a loophole for people with less-than-perfect credit scores. There are multiple lenders that out your ability to repay the loan above your credit rating, making it possible to qualify for personal loans to people with credit issues.

Payment History

Your payment history makes up about 35% of your credit score. Therefore, it’s important to maintain it in tip-top shape. Payment or credit history is a record of how you handle your debt. In most cases, loan payments stay on your credit history for approximately seven years. If a lender sees that you violated your loan terms, it may either deny you a loan or offer you less favorable loan conditions.

Origination Fee

Origination fees are extra costs lenders charge for processing your loan. This includes handling your application, conducting a credit check, and closing the deal. Each lender sets its range of origination fees, but typically they are between 1% and 10% of your loan amount. In most cases, a lender will deduct your origination fee amount from your loan principal.

How to Qualify for a Personal Loan?

At first glance, the answer is simple. You just need to meet a lender’s eligibility requirements to qualify for a personal loan. However, there’s no single formula for success due to the different criteria lenders use. There are just some basic recommendations that may improve your chances of getting approved. They include:

• Credit score of at least 670. As you never know which of three credit bureaus a lender uses to review your FICO rating, it’s recommended to review all your credit reports and make sure they contain accurate information;
• Debt-to-income ratio doesn’t exceed 35%. The lower your DTI, the higher your chance of getting approved for a loan. Although some lenders may accept your application even if your DTI is over 40%, it may result in worse loan terms;
• Steady and sufficient income. Although minimum income requirements always vary by lender, your monthly earnings typically need to be enough to cover your monthly payment. Many lenders will also take into account your current debts and other regular payments you make on a monthly basis.

Even if you don’t match the requirements mentioned above, you can still qualify for some personal loan options. The lending market is full of loan providers with more lenient qualification criteria. To find one, shop around and pre-qualify for personal loans from several lenders. As pre-qualifying comes with soft credit checks only, it will help you compare offers and find a suitable deal without any negative impact on your credit score.

What Documents Might Personal Loan Lenders Ask to Provide?

Meeting personal loan eligibility requirements is a must-do. However, you also need to do some paperwork to verify your identity, income, and residence. Here’s the list of documents you will be asked to provide.

Loan Application

A loan application is a specific form you need to fill out to start a lending process. This document contains all the basic personal and financial information about you that a lender may need to make a loan decision. It also specifies the amount you want to borrow, a desired repayment term, and your loan purpose.

The way you can apply also depends on the loan provider. While some lenders offer a completely online application procedure, others may ask you to visit a store and fill out all the paperwork in person.

Personal Identification

Your personal identification is needed to make sure you’re a US legal resident who has already reached the age of 18. Most lenders require you to provide at least two forms of government-issued identification. They may include the following:

• State-issued ID;
• Driver’s license;
• Passport;
• Birth certificate;
• Military ID;
• Certificate of citizenship.

Income Confirmation and Employer Details

Before giving you a loan, a lender wants to know more about your financial situation. Therefore, it will review your employment history and ask you to provide proof of income. Cash receipts from both your traditional employment and alternative verifiable income sources can be accepted. The confirmation of your current income comes in the form of bank statements, pay stubs, returns, employer contact information, etc.

Additionally, you will be asked to specify your employer’s contact details. This information may be used to verify your employment or make sure the data you provide are accurate.

Proof of Address

Typically, lenders require you to be a permanent resident of the state you apply in. Therefore, they always ask you for proof of address. This happens because each state requires loan providers to have a license to operate legally in the area. A lender will not be able to offer you a loan unless it is licensed by your state of residence.

Also, proof of address is an indicator of your stable living situation. Plus, a lender will know how to contact you if needed. To confirm your address, you may be asked to provide one of the following documents:

• Current utility bills;
• Copy of your rental agreement;
• A deed to a house;
• Property tax notice statement;
• Voter registration card;
• Auto insurance with a specified address.

How to Get a Personal Loan: 5 Steps to Follow

If you’re going to apply for a personal loan, here are a few steps you need to take:

1. Check your credit profile. Before you initiate an application process, make sure your credit profile looks attractive to potential lenders. You can do it via the Annualcreditreport.com for free once a year. If you’re not in urgent need of cash, take some time to improve your credit score, for example, by paying off some debts. Also, make sure your credit report contains accurate information.
2. Shop around for the best offer. Decide on how much money you need and start your journey by reviewing offers available on the market. Make sure you meet the requirements and pre-qualify from several lenders. Then, you will be able to compare your potential loan terms and settle on the proposal that better meets your needs.
3. Submit the formal loan request. To complete the application process, gather all the needed supporting documents or their copies and attach them to your application form. A lender will perform a hard credit inquiry to make sure you’re an eligible and responsible applicant. The verification process may take up to a few business days, so don’t expect to get a loan decision instantly.
4. Accept an offer. If approved, you will be notified by phone or via email. Then, you need to get acquainted with your loan agreement terms and sign the contract if it suits you.
5. Receive the funds. The will be transferred to you via a direct deposit into your bank account or debit card. The process typically takes from 1 to 3 business days. Some lenders may also allow you to get the loan amount in cash by visiting their brick-and-mortar stores.

Why Might I Be Denied for a Personal Loan?

The most common reasons for loan denial include low credit scores, high debt-to-income ratio, short credit history, and insufficient income. Additionally, a lender may turn down your loan application if it thinks the requested amount is higher than the one you can afford to repay.

Even if you meet a minimum income requirement set by a specific lender, it can still pay attention to your family composition and current financial obligations. They may include not only credit cards and other loans but also your rent and utility payments.

What to Do If a Lender Turns Down My Personal Loan Application?

If your personal loan application was denied, there are a few steps you can take:

• Ask for a reason for loan rejection. You can request an adverse action letter from your lender to find out why you were denied a loan. It’s always easier to fix the problem when you know what it is;
• Improve your DTI ratio. Try to pay off some of your current debts or credit card balances to decrease your DTI ratio to 35% or lower. This will improve your chances of qualifying;
• Pay your bills and loans on time. Each of your loan and bill payments is reported to major credit bureaus. Paying on schedule can either improve your credit score or maintain it on a “good” level. On the opposite, when you pay late, it drops your credit score, reducing your chances of getting a loan in the future;
• Apply with a co-signer. If a lender accepts joint applications, it can be a great opportunity for you. By adding a co-applicant with a strong credit history and steady income, you provide an extra guarantee to a lender. If you become unable to make your debt payments, a co-signer will be responsible for paying off your loan; 
• Get a secured loan. Collateral is another form of repayment guarantee you can use to make your loan application more attractive to lenders. A secured loan means that you borrow money against some of your valuable property. It can be your house, vehicle, savings account balance, and more. As a lender has a legal right to repossess your property in case you default, it will be more willing to lend you money;
• Request a lower loan amount. A lower loan amount usually reduces your monthly payment and carries less risk for a loan provider. Thus, it may be more lenient and accept your loan application;   
• Turn to credit unions. Credit unions often have more relaxed eligibility criteria due to their not-for-profit nature. They also have products for people with low income and bad credit. However, you need to be a current member of one to access their loan offers.

Bottom Line

Before you apply for a personal loan, you need to make sure you meet the lender’s requirements. The list of parameters is often the same. Typically, lenders look at your credit score, income, payment history, and debt-to-income ratio when determining your personal loan eligibility. However, the pass-through values may vary by lender. Therefore, it is recommended to review your credit reports thoroughly and compare lenders not only in terms of the loan conditions they offer but also pay attention to their specific eligibility criteria.

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