Personal Loan Requirements and How To Meet Them
- You’ll generally need a good credit score (670 or higher) and a low debt-to-income ratio (36% or less) to qualify for the best rates with most lenders.
- It’s possible to get approved if you don’t meet those criteria, but you’ll often pay higher rates.
- You can check your loan options and approval odds by getting prequalified with a lender using a soft credit check, which doesn’t impact your score.
- If you can’t get approved for a personal loan, you have other options, like applying with a cosigner or using collateral.
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 the loan amount, you typically need a good credit score and reliable income to qualify.
Understanding common qualification requirements for personal loans can help you improve your chances of approval, helping you secure better rates and terms.
4 common personal loan requirements
Before starting the application process, it’s a good idea to 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 for a personal loan. Missed payments could impact your credit, with a single late payment remaining on your credit report for up to seven years.
Lenders also commonly look for other clues in your credit history, such as whether — and how long ago — you might have filed for bankruptcy or when you last applied for other credit.
Your credit score is more than just a number — it will make or break your ability to get a loan. Check your score for free with LendingTree Spring. You can even test scenarios, like how taking out a short-term loan will affect your score.
2. Income
Lenders often require a minimum 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.
Lenders also look for consistency in income. The more regular your payments, the better. If you earn a regular monthly salary, lenders will view that more favorably compared to someone who earns most of their income sporadically throughout the year.
If you don’t earn enough to qualify for a personal loan, you can 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. The DTI ratio is important since it reassures the lender that you have enough income after paying your essential bills to cover your personal loan payment.
Most lenders prefer applicants with a DTI ratio of 36% or less, although it’s often possible to get approved with a higher ratio. You may pay higher costs as a result, though.
To calculate your DTI ratio, add up all of your minimum monthly payments and divide this amount by your gross monthly income. Let’s say your monthly bills total $2,150 and you earn $6,000 gross per month.
Here’s how that would look: $2,150 ÷ $6,000 = 36% DTI ratio
4. Collateral
Most personal loans are unsecured, meaning that you haven’t pledged any collateral that the lender can take if you don’t repay the loan. Because they’re unsecured, lenders can offer faster approval and funding timelines for personal loans since they don’t need to review any collateral. But you’ll typically pay slightly higher rates and need to meet higher approval requirements.
Some lenders will let you use collateral to get a secured personal loan if you’re unable to get approved otherwise, or if you just want to pay lower rates. 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.
Tip: Some lenders also allow you to apply for a joint personal loan with a more creditworthy cosigner as an alternative to using collateral, if you’re unable to get approved on your own.
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:
- 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.
Questions to ask before taking out a personal loan
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 on the dotted line.
Is a personal loan the right choice?
While a personal loan can help during times of financial hardship, other low-cost options might be a better fit for your situation. A 0% intro APR credit card could pause your interest for up to 15 months, helping you save hundreds of dollars on balance transfers and new purchases.
If you’re juggling a mountain of debt, a debt consolidation loan could 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. Credit counseling can also help if you’re struggling with debt payments. Home equity loans and HELOCs are also a low-cost option for homeowners.
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 versus 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. Most personal loans offer fixed rates, but it’s worth checking first.
- Origination fees: Some personal loans charge a one-time origination fee, often ranging from 1% to 10% of the loan’s principal. This fee is often taken from your loan proceeds, lowering the amount you get back, so plan accordingly. Consider one of LendingTree’s 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. However, this fee is uncommon among personal loan lenders.
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 LendingTree personal loan calculator 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.
Other questions to ask the lender before applying
- Can I see a fee schedule? Lenders are quick to advertise “no fees,” but that often doesn’t include fees that you might pay, such as if you make a late payment. A fee schedule should list out every possible fee you might owe.
- How long does funding take? Some lenders offer same-day funding, while others can take a week or more.
- Can I get prequalified with a soft credit check? Most lenders allow you to check your potential rates and loan options by getting prequalified, which doesn’t impact your credit score like a hard credit inquiry when you formally apply for a loan.
- What hardship options and support do you offer? Personal loans can last for several years, and no one can predict the future. Some lenders offer better support than others if you run into temporary hardships as you repay the loan.
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 poor or even no credit, 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 money.
- Lower your DTI ratio: Lenders may view a high DTI ratio as indication that your budget is 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 use assets like a car or investment account to obtain lower loan rates and more flexible repayment terms. However, compare the differences between unsecured and 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.
| Credit and DTI ratio | Possible outcomes |
|---|---|
| Good credit (670+) and low DTI (under ~40%) | Strong approval odds and access to the lowest rates |
| Fair credit (580–669) and moderate DTI (40–50%) | Some lenders may approve you, but may only offer higher rates |
| Poor credit (below 580) | Approval is possible, but typically comes with higher APRs and fewer options to choose from – may need to add a co-borrower/cosigner or show high income |
| High DTI (above 50%) | Approval for a loan may be difficult unless you have a high income or a co-borrower |
| Inconsistent income | Some lenders may require you to provide additional documentation or a longer income history |
LendingTree tip: Whether you do or don’t meet the ideal criteria for a loan, this is where comparing multiple lenders can help you land the lowest rates and save the most money. Consumers could save an average of $1,659 by shopping around on the LendingTree marketplace for a personal loan.
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. Alternatively, 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 if you have too much other debt.
Review your credit report for mistakes and errors
Mistakes and fraudulent activity can happen, causing a ding to your credit score. As a result, lenders may be getting an unfair picture of your creditworthiness. You can fix this by getting a copy of your credit report from each of the three credit bureaus, and combing through them for inaccurate information. If you find any errors, you can submit 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 might think you can’t 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, which measures how much of your available credit (on credit cards) that you’re currently using. A lender could deny your application if you’re carrying a lot of credit card debt relative to your combined credit limits.
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. In addition to giving you more leeway to make monthly payments on a personal loan, doing so will also lower your DTI ratio.
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 a poor credit score. Ask your lender if applying for a smaller personal loan might boost your approval odds.
Find a cosigner or use collateral
If you can’t get a loan based on your own income and credit profile, it’s possible to bring in extra help. Some personal loan lenders allow you to apply with collateral or a cosigner to increase your chances of approval. Be aware that these options have downsides, though — if you don’t repay the loan as agreed, a lender can repossess your collateral, or it could damage your cosigner’s credit.
Consider alternative financing options
If you’re struggling to get approved for a personal loan and you don’t have access to collateral or a cosigner, 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.
- Home equity line of credit (HELOC) or home equity loan: A 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. A home equity loan is structured more like a personal loan, with a set repayment term and fixed rates. However, you risk losing your home if you can’t repay the debt.
- Crowdfunding: Some people are successful in raising funds through sites like GoFundMe, particularly if they have an active online social network and need financial support for a sympathetic cause.
- Borrow from friends and family: If you have friends and family members willing to support you, consider asking them for a loan if you’re certain you can repay it. It’s a good idea to draft up a personal loan agreement specifying due dates, late payment penalties and interest charges, just the same as any other lender, to make things equitable.
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