- Lenders look for good credit scores and low debt-to-income ratios when reviewing personal loan applications.
- You’ll need to provide information about your income and employment to apply for a personal loan.
- It’s vital to shop around for personal loans since the terms and features vary from lender to lender.
- If you aren’t able to qualify, there may be alternative options.
Personal loans can be a helpful financial tool to get out of debt faster or avoid taking on higher-interest debt if you run into a large expense you couldn’t otherwise afford. But they’re not available to everyone, as lenders have specific requirements that help them decide who’s qualified. Like many financial products, the key lies in cultivating a strong credit profile through responsible spending.
If you’re in need of a personal loan here’s what you need to know about getting approved and shopping around for the best loan, plus alternative options if you aren’t able to qualify.
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What you need to get approved for a personal loan
Different lenders will have their own underwriting requirements for personal loan approval. But, in general, they’ll look at a few factors:
Credit score: Your credit score can give lenders insight into things like whether or not you pay your bills on time; if you’ve recently applied for other lines of credit; and how much debt you already have. “Lenders want to see a low risk and a high credit score, 750 or higher, preferably—I'd say people should aim to have a score of at least 700 if they want to secure a competitive interest rate,” says personal finance expert Claire Tak, a writer and editor who’s covered money for nearly a decade for companies like Wells Fargo.
Income: Lenders want to make sure that you’re going to pay back the loan, and that means you’ll have to have adequate income. Of course, the minimum income required depends on the lender. The higher your income, the more likely you are to qualify and score a lower rate.
Debt-to-income (DTI) ratio: Your DTI ratio can be found with a quick calculation: existing monthly debt payments divided by your monthly gross income. So if you pay $200 toward your credit cards each month, and you earn $3,500 a month, your DTI ratio would be about 5.7%. But keep in mind that rent is also factored into your DTI ratio, even though it isn’t usually categorized as debt. In general, you should shoot for a DTI ratio below 36%, and ideally, most of that would be your mortgage or rent payment.
“In today's market, lenders are more cautious,” says Tak, so they’ll want to see positives across all of these factors to approve your application.
If you're not altogether creditworthy, so to speak, in these traditional categories, you might consider a secured personal loan as opposed to typical unsecured personal loans. A secured loan is less risky for lenders—and more attainable for you—because the debt is secured by an asset. You might post your car or cash as collateral, for example, to qualify for a secured personal loan. The risk to you, though, is that struggling in repayment on a secured loan could be losing that asset.
What you need to apply for a personal loan
When you apply for a personal loan, you’ll need to provide information to signal that you qualify. That generally includes the following:
Personal details: your contact information, Social Security Number or Individual Tax Identification Number (ITIN), date of birth and citizenship status
Employment and income details: your employment status, employer, gross monthly income and monthly mortgage or rent payment amount
And, of course you’ll need to specify the details of your desired personal loan, including the desired term, loan amount and sometimes, why you want to take the loan out. (You can’t use a personal loan for some things, like paying for college or buying a house.)
Depending on the lender and your answers to those questions, you may have to provide additional documentation for verification. That can include things like:
Pay stubs, W2s or tax returns (income)
Utility bills (address)
Copy of driver’s license (identity)
How to shop for personal loans if you’re eligible
If you’re eligible for a personal loan, it’s important to understand that not every lender is going to offer the same perks or features as others. So it’s vital to shop around if you’re going to find a loan that meets your needs.
For example, you may want to consider the term lengths offered; what (if any) extras are charged (be wary of origination fees); and if you get to pick your payment due date. But beyond the loan details, you’ll also want to survey the company itself and how it supports borrowers.
“Look for lenders who have an established history of great service—look at reviews on TrustPilot and other trusted sites that give an unbiased review,” says Tak. She adds that great service can be different for everyone, but some of the things you may want to consider include:
If they offer live customer service that you can call at any time
How quickly they can approve you, and how quickly they disburse funds (some lenders can fund loans within 24 hours)
If the lender uses multiple factors to approve people, like your education and job (rather than just credit score)
Once you’ve narrowed things down to a few lenders, check if you can prequalify for the loan. That way, you’ll be able to see what actual terms you might get with each lender without hurting your credit score.
Sound Dollar reviewed 15 personal loan companies in mid-2022 and determined that the following lenders performed best in customer service and cost, among other categories.
Alternative options if you can’t qualify for a personal loan
If you’re currently ineligible for a personal loan, you may still have options. For example, you might consider the following[5-6]:
Personal loan cosigner or co-borrower: The key here is to ensure that your co-applicant has a solid credit score (670 or higher), a good income and DTI ratio, since that’s what lenders would be considering in approving your application. Co-applicants are legally responsible for repayment, however, and their credit report would reflect any problems paying back the debt.
Secured personal loan: As mentioned above, there are secured and unsecured loans, with secured being more accessible if you're not creditworthy in the traditional sense of the word. If you have assets to use as collateral, you might have an easier time getting approved for a secured loan. Just be mindful that if your repayment on that secured debt goes south, you could lose the asset.
Balance transfer card: If you’re trying to consolidate credit card debt and considerable savings, this is a solid option. Depending on the card, you may be able to get a 0% APR for a number of months. That can help you save on the long-term costs of that debt. But keep in mind that you’ll likely pay a balance-transfer fee. Also, the APR will jump once the promotion period ends, so you’ll ideally zero the balance before that date.
Home equity loan: If you own your home, a home equity loan may be able to provide the funds you need. These loans take money out of your equity (home value minus your current mortgage balance). But you should know that this requires you to use your home as collateral, meaning that you risk foreclosure if you default on the debt.
Borrowing from a family member: If possible, borrowing from someone you know can help get you through a tough financial spot even if you don’t have great credit. The key is to set expectations and requirements up front so that it doesn’t cause issues with your relationship.
No matter which path you choose, it’s always a good idea to focus on getting your finances to a place where you can qualify for a personal loan in the future, should you need it.
“My recommendation is to start building credit now,” says Tak. “Open a secured credit card and make monthly payments on time. Get on a loved one's credit card as an authorized user—you don't even have to use the card, as long as the main cardholder is responsible and pays their bills on time!”
You can also consider a credit builder loan to start improving your creditworthiness, making it easier to get personal loan approval in the future.