Update on Wednesday, June 17, 2020
From paying hefty car repair bills to consolidating high-interest debt, there are many reasons for why you might suddenly need some extra cash. Personal loans are one way to get funds quickly to cover financial obligations.
Typically offered as unsecured installment loans, personal loans are not backed up by any collateral. Thatâ€™s why lenders rely heavily on your creditworthiness as a way to determine both your eligibility and your ability to pay them back. Here are common personal loan requirements to expect, as well as some pointers to keep in mind when applying.
Because personal loans are not secured by an asset like a car or a house, they may be more difficult to qualify for and involve higher interest rates than other types of loans. The lender doesnâ€™t have the ability to seize and sell your property to cover the cost of your loan if you canâ€™t pay it back. As a result, they may set out more comprehensive requirements to ensure you have a solid credit history.
While eligibility criteria may vary from lender to lender, here are some of the most common personal loan requirements:
|How to apply for a personal loan|
|Check your credit, and determine your financial needs||Lenders rely on your credit to determine eligibility. But you should also know how much you need to borrow, and why.|
|Research lenders and apply for prequalification||Prequalification doesnâ€™t affect your credit, but it can allow you to see loan terms and interest rates you could be eligible for and compare lenders.|
|Choose a lender and submit a formal application||Fill in the appropriate paperwork and submit to a hard credit check.|
|Gather documentation and submit whatâ€™s requested||Provide copies of documents such as proof of employment, income and verification of your identity.|
|Wait for loan approval||Once approved, your funds could be deposited into your bank account as soon as the next business day.|
Before applying for a personal loan, youâ€™ll want to determine whether you can meet lender credit requirements. You can check your credit score for free from a number of places, such as your credit card issuer, the Discover Bank Free Credit Scorecard or by signing up with My LendingTree, a credit monitoring service offered by Through AnnualCreditReport.com, you can get a free credit report once every 12 months from the three major three credit bureaus: Equifax, Experian and TransUnion.
Knowing your credit score and whatâ€™s in your credit reports will give you an idea of the range of credit offers and interest rates you may be eligible for. For example, some lenders require a minimum credit score of 640.
You should also take a look at your overall budget and clarify your financial needs to determine how much you may need to borrow. (You can use this online personal loan calculator to see whatâ€™s affordable for you.) Personal loan lenders typically have borrowing limits between $1,000 and $50,000, while repayment terms generally last from 12 to 60 months or longer.
Make sure you shop around for the right lender for you, whether itâ€™s a traditional financial institution like a bank, a credit union or an online lender. Depending on your overall financial health, you may discover you are eligible to borrow more funds with some lenders, pay better APRs (annual percentage rates) or benefit from longer terms in which to repay your loan.
As member-owned institutions, credit unions may be more forgiving of borrowers with dings on their credit. Online lenders, meanwhile, may offer lower interest rates as they have lower overhead costs. The flipside is that these lenders may not offer the same lending experience as traditional lenders, where you have the option of face-to-face interaction with your loan officer.
The prequalification process is a quick, convenient way to compare lenders online based on your credit profile, without affecting your score since only a soft pull is placed on your history. When applying for prequalification, expect to provide basic information such as:
Once you have chosen a lender with the right terms for you, you will have to submit a formal application. This may be done either online or in-person if you have chosen a brick-and-mortar institution. The application will authorize the lender to perform a hard credit check, which will ding your credit score in the short term.
As part of the application process, the lender will request supporting documentation, such as:
You may also need to show what other debts youâ€™re currently paying off. Depending on your personal circumstances you may be asked for other documentation such as a letter from your employer.
Depending on your lender and your credit profile, you may be approved for a loan as quickly as the same day. Funds are typically deposited electronically directly into your bank account within a few business days, depending on the lender.
If youâ€™re rejected for a personal loan, you can reach out to the lender to find out why. The reasons could be related to a low credit score, low income, unstable employment history or having too much debt.
Knowing why you were rejected can help you decide on your next steps, whether youâ€™ll take time to improve your credit or seek out lenders with more relaxed credit requirements, such as personal loans for borrowers with bad credit.
To improve your overall creditworthiness, consider following these basic steps:
Because traditional personal loans rely heavily on your credit health, can come with high interest rates to offset your risk of defaulting on it. Be aware of predatory lenders with exorbitant rates and make sure to read the fine print before you sign anything.
Unsecured personal loans can be a better option for borrowers with high credit scores who are perceived to be at low risk of defaulting. A viable alternative may be getting a secured personal loan through a lender such as OneMain Financial. Since these loans are backed by a tangible asset such as a car or a home, they can be easier to qualify for as well as offer lower interest rates.
If you have bad credit, you may be tempted to take out a payday loan. These short-term loans come with high triple-digit APRs. Though some personal loans can come with over 100% APR for borrowers with bad credit, some lenders will offer much lower caps.
When shopping for lenders, be sure to review lender terms and fee structures. If this information isnâ€™t readily available on the lenderâ€™s website, get in touch with their customer support team. They should be willing to help you so you can make an informed borrowing decision.
If a personal loan isnâ€™t a viable option for you but you need to borrow funds, consider alternative options. You might charge the cost to a credit card, ask your workplace for a paycheck advance or borrow money from friends and family, for example.