A personal loan is a great option when borrowing money for unexpected or significant expenses. However, to get the most from a personal loan, it is essential to have a solid plan for paying it off.
It would help if you considered all aspects of a personal loan application, such as your financial standing, lender, and repayment plan. This guide will walk you through the process in eight steps.
Personal Loan Requirements
Credit Score and History
A lender will consider the credit score of an applicant when evaluating a loan request. Credit scores are calculated based on payment history and length of credit history. They can range between 300 and 850. Although lenders usually require applicants with a minimum score of 600, some lenders will lend without a credit history.
Lenders may place income requirements on borrowers to make sure they can repay a loan. Each lender has different income requirements. SoFi has a minimum salary requirement of $45,000 per annum; Avant has a lower annual income requirement of $20,000. If your lender does not disclose minimum income requirements, you shouldn’t be surprised. Many don’t.
Examples of income include tax returns, bank statements, payslips, and letters signed by employers. Self-employed candidates can also provide bank deposits or tax returns.
The ratio of debt-to-income (DTI), expressed as a percentage, represents the amount of a borrower’s monthly gross income towards paying her monthly debt service. Lenders use DTI to predict a prospective borrower’s ability to make monthly payments on current and new debt. It is best to have a DTI below 36%. However, some lenders will approve highly qualified applicants with ratios up to 50%.
Lenders will ask you to pledge assets or collateral if you apply for a secured personal loan. The collateral for cars or home loans is usually related to its underlying purpose. But, personal loans secured with collateral can also be protected by other valuable assets such as cash or investment accounts.
Suppose you default on your loan payments or fall behind. In that case, the lender may take possession of the collateral to recover the loan balance.
Lenders may require that borrowers pay a personal loan origination fee to cover processing fees, credit checks, and closing costs. Depending on the applicant’s credit score or loan amount, these fees typically range between 1% and 8% of the total loan amount. Some lenders collect origination fee cash at closing. Others finance them as part or subtract from the total loan amount.
Typical Personal Loan Documents
When you are ready to apply for a personal loan, your lender will ask you to provide a few documents. These documents can be anything from proof of identity to a warranty that your residence is correct and your employment status. Here are some of the essential documents lenders will require for your loan application.
To begin the loan process, prospective borrowers must complete and submit a loan application. Each lender will have its application. Therefore, the requirements for each applicant may differ. However, in general, you will need to give basic personal information and details about how much you are looking to borrow and the purpose of the loan.
Each lender may also have different formats for loan applications. Although many online lenders offer an easy way to submit a loan application online, some may require that you speak with a representative over the phone to decide. Many brick-and-mortar financial institutions require applicants to submit paper applications.
Proof of Identity
To prove that they are at least 18 and a US citizen, most lenders require applicants to provide at least two forms of government-issued ID. This protects against identity theft. Acceptable forms to be used for government-issued identification are:
- Driver’s license
- Other state-issued ID
- Certificate of citizenship
- Birth certificate
- Military ID
Employer and Income Verification
Lenders will want to verify that you can repay your existing debts and the new loan. As part of the application process, lenders often ask prospective borrowers for income and employment history proof. The following forms of income verification are common for traditional employment:
- W-2s & 1099s
- Bank statements
- Employer contact information
Instead, self-employed borrowers must rely on bank statements, 1099 forms, and income tax returns.
Proof of Address
- Lenders want to confirm your employment. This might include providing proof of your residence, such as a copy of your lease, other rental agreement, voter card, or evidence you have a warranty of home, rental, auto, or car insurance that lists your address.
8 Easy Steps to Get a Personal Loan
You can get a personal loan for many reasons. Follow these eight steps to get a private mortgage.
Use the numbers
You or lenders do not want to see you take out personal loans that you cannot afford to repay. While lenders do their research to ensure that you can repay the debt on time, it is wise to verify your numbers.
Begin by determining how much money you need. Some lenders charge an origination cost, which is taken from your loan proceeds. You should ensure that you borrow enough cash to pay the fee.
Calculate your monthly payment using a personal loans calculator. You may not be able to determine lenders’ interest rates or repayment terms. But you can use the calculator to estimate the monthly cost of your loan.
Check your credit score.
Many lenders will run credit checks to determine how likely you will repay your loan. Although online lenders can now access alternative credit data, most lenders still will look at your credit history.
Most personal loans require at least fair credit. This usually ranges between 580 to 669. A good credit score of at least 670 will increase your chances of being approved and get you a low-interest rate.
You can get a copy of your credit report from AnnualCreditReport.com. Each month, the site will give you a free copy of your credit report from all three bureaus. Verify the information for errors. For corrections, contact TransUnion, Equifax, and Experian.
A loan may be available to you even if your credit score is not high for any other reason. The fees and interest rates could be too high for you to justify applying, so do your research before using it.
Consider your options
Your creditworthiness may require a cosigner to get approved for personal loans with decent interest rates. You might be eligible for a secured personal loan if you don’t have a cosigner or your lenders won’t accept cosigners.
Secured loans are secured by collateral. Lenders can take the collateral if the borrower fails to repay the loan.
It is also essential to determine where you can obtain a personal loan. Bad credit can make it difficult for you to be approved at traditional banks. However, some online lenders specialize in working with borrowers with poor credit. Some credit unions also offer short-term loans that can be cheap alternatives to payday loans.
If you don’t meet these requirements, your purchase may be delayed. Take some time to build your credit score and qualify.
Choose your loan type.
Once you know your credit standing and consider your options, you can determine the best loan type. Although some lenders allow you to use the funds in various ways, others may not approve specific loan applications.
A lender may let you borrow money for personal purposes but not for business. It is generally a brilliant idea to find a lender willing to lend money for precisely why you need it.
The Bankrate personal loans marketplace offers a variety of loan types, including.
- Consolidating your debt with a loan: One of the most common uses of personal loans is debt consolidation. One loan can be used to pay off your existing debt. You will also reduce the amount you have to pay each month and may receive a lower interest rate.
- Payoff offers loans to people who are looking to refinance their credit cards. A personal loan is an excellent option to eliminate credit card debts and make them pay off over a more extended period, as they have lower interest rates than credit card ones.
- Home improvement loans are a great option to pay upfront for extensive renovations without a secured equity loan.
- Personal loans: Medical expenses can often be unpredictable, so a personal loan could be an excellent option to lower your immediate financial burden and reduce your debt.
- Loans for an emergency: These loans can be used for various reasons. You may need this loan for an emergency, such as a car breakdown, minor medical bills, or a burst pipe.
- Personal loans are often used to finance weddings and vacations. Spreading the payments over many years means that you don’t have all of your expenses at once.
Search for the best personal loans
Don’t settle for the first offer. Take your time to shop around for the best interest rates. You can compare loan types and lenders to see what you are eligible for.
There are usually personal loan offers available from banks, credit cooperatives, and online lenders. Consider checking with your bank/credit union first, especially if you have been a long-term account holder. Suppose you can prove that you’ve made wise financial decisions for many years. It may mean your bank/credit union will be more willing to accept recent credit mistakes and give you a better interest rate.
Online lenders may also permit you to be prequalified by performing a soft credit assessment. This will not affect your credit score. You should check with any lenders to determine if they offer prequalification. You can use this option to understand the rates available.
Lenders that do not offer a prequalification procedure will usually run hard credit checks as part of the loan application. It’s best to rate the shop within 45 days to limit the negative impact of hard inquiries.
Select a lender and apply
After researching, select the best lender for you and start the application process.
Depending on the lender you choose, the process may be completed online. You may also need to apply at your bank branch or credit union.
Although every lender has different requirements, most information required for an application is the same. You must include your name, address, contact information, and income and employment information.
The lender will ask you to disclose how much you are willing to borrow. After performing a soft credit assessment, it may give you several options. You will be able to go over all terms and conditions, including fees and the repayment period. You can avoid paying hidden fees and other traps by reading the loan agreement carefully.
Provide necessary documentation
There are many things that lenders require you to do to be approved. Your lender will likely request additional documentation once you have submitted your application. A copy of your last pay stub or proof that you are a country resident may be required.
You will be informed by the lender if any documentation is required and how you can get it to them. The sooner you can provide the information, then you will receive a decision as quickly as possible.
Accept the loan offer and make payments.
After being notified by the lender that you have been approved, you need to complete the loan documents. You must also accept the terms. The loan funds will usually be available within a week. However, some lenders may take up to two weeks for you.
After being approved, begin keeping track of your payment due date and consider automatic payments through your checking account. You may be eligible for interest rate discounts from some lenders if your account is set to play automatically.
Consider increasing your monthly payment. Personal loans may be less expensive than credit cards, but you can still save interest by repaying the loan early. Even a tiny increase in your monthly payments could help you achieve this goal.
Factors affecting your interest rates
Lenders have different requirements for personal loans, but they all look at the same criteria to determine your interest rates.
- Your credit score: High credit scores can make getting a personal loan at lower interest rates more accessible. Lenders will look at your credit history and score to determine if there are any adverse marks like late payments or accounts that have not been paid on time.
- DTI (debt-to-income) ratio: The DTI ratio is your monthly debt divided by your monthly gross income. Low DTI ratios are generally a sign to lenders that your ability to pay monthly personal loans is possible.
- Loan term: In general, shorter repayment terms mean lower interest rates. A more extended repayment period usually leads to a higher interest rate.
- You will need a cosigner. To increase your chances for approval, a friend, family member, or relative in good financial standing can be your cosigner.
You won’t qualify for the lowest personal loan rates if you have poor credit, a high DTI rate, and don’t have a cosigner who has good credit and stable income. The most competitive rates will be offered to those with solid credit and a low DTI.
Do I have to prequalify for personal loans?
Look for lenders who offer prequalification to help you determine your loan rates and terms before submitting a formal application. Prequalifying does not require any commitment and uses only a soft credit inquiry. This means that your credit score won’t be affected.
A basic questionnaire will be required to help you determine whether you are eligible for prequalification. Your name, address, Social Security number, annual gross income, loan amount, and reason for applying for a loan may be included.
A prequalification form may ask additional questions depending on the lender. The lender will request any supporting documents you need after accepting an offer. This stage is not where you will be required to submit other documentation.
Tips to Speed Up the Process
Personal loans are something you want as quickly as possible. These tips can help avoid delays when applying for a personal loan.
- Before you apply, check your credit score. Before applying for personal loans, you need to understand your credit score. It’s easy to identify and correct errors quickly to avoid problems later when you apply for a loan.
- Get rid of your debt. If you are in debt but don’t have the funds to pay it off immediately, your credit score can improve. It can also lower your DTI ratio, increasing your chances for approval.
- Talk to your current financial institution. Credit unions may be more open to personal loans from customers who have had positive and long-lasting relationships.
- It would help if you considered online lenders. If you’re approved, many online lenders can offer loans within hours. Funds may be deposited directly into your account within days.
- To pick up your loan funds, you must be present in person. Ask your lender about the possibility of picking up loan funds at their brick-and-mortar branch. This will allow you to get the money quicker.
How to Respond if You are Denied
There are many reasons why a lender might deny your loan request. Your credit score and DTI might be too low. A bank may ask you to borrow more money than you can repay. This is based on income, stability of employment, and other debts.
You can take a few steps to increase your chances of getting a personal loan in the future if a lender rejects your application:
- Request the reason why your application was denied
- Examine your loan application for inaccuracies or mistakes
- Improve your credit score by paying down your current outstanding debts
- Check your credit report for blunders
- Increase your income
- Compare lender requirements
- Apply to a lower loan amount
- Consider using a cosigner
How can collateral be used to secure a personal mortgage?
For secured personal loans, lenders only require collateral. These assets are typically acceptable collateral when applying for a secured personal loan.
- Money in a savings account or certificate of deposit (CD).
- Insurance policy
- Fine art
- Precious metals
- Future paychecks
How much time does it take for a personal loan to be approved?
The turnaround time for personal loans varies between traditional banks, online lenders, and credit unions. The conventional banks and credit associations can take up to seven business days to fund. Online lenders tend to be the fastest, with some lenders offering same-day approvals and next-day financing.
Do you need income proof to get a personal loan for your home?
Your income is crucial for the lender’s qualification and your ability to repay the loan. Lenders require proof that you can pay your loan repayments. Avoid taking out additional debt if there is no job or alternative income source.
What are the conditions that prevent you from getting personal loans?
A personal loan is not possible for everyone, even those with good credit. Although there are many reasons for personal loan denials, the most common ones relate to your credit score and history. People with bad, damaged, or insufficient credit are more likely to be denied a personal loan. Lenders are not likely to approve you if your income isn’t enough to pay the monthly repayments.