Personal Loan Eligibility: What to Know Before You Apply
Thinking about a personal loan? For whatever reason it might be—consolidating credit cards, making a big purchase, or paying down debt faster—it’s important to find a loan that not only meets your needs, but one you have a good chance of qualifying for. Here’s what you need to know about personal loan eligibility and personal loan requirements before applying.
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From your credit score to your assets, key pieces of your finances will play a big factor in whether you’re approved for a loan, how much you qualify for, and what rates and terms you’ll receive. Here’s what a lender looks at when they review your personal loan eligibility.
Do you show a history of paying your debt on time? Though credit score requirements vary from lender to lender, a good credit score is one of the leading factors in determining eligibility. Most lenders prefer extending credit to borrowers with good or excellent credit scores—670 and up. Below that range, loans can often still be approved, but interest rates may be higher.
Keep in mind a high credit score doesn’t automatically mean you’ll get a low interest rate, but it does help.
While payment history is the biggest factor in determining your credit score, it is also something lenders may look at in more detail when reviewing your loan application. From the lender’s perspective, how well you paid your debts in the past is a good indicator of how you will repay your loan.
Before you apply for a loan make sure all of your debts are current. If you have any past due balances, address those immediately. It won’t erase the past — any missed payments remain on your credit report for seven years — but it can help show lenders you’re working on improving your financial situation. Once you’ve got all your accounts current, set up automatic bill pay or automatic payment reminders so you never miss a deadline. Over time, your payment history (and credit score) could improve. ^1^
Income is a crucial factor in eligibility because it gives lenders confidence you have the means to pay back the loan. Most lenders set a minimum income limit for loan approvals, depending on the asking amount. If you have full time or part time income, plan on sharing your last two or more paystubs. If you’re a gig worker or freelancer without a steady paycheck, many lenders will still be willing to work with you. However, you may need to supply additional proof of your income or average out your pay into a month-by-month basis. To save time, get your tax returns, 1099s, and balance sheets together. All of these documents can help prove irregular income.
Every lender is different, so don’t get discouraged if you’re denied based on income by one company. Shop around to find one that works for you.
Lenders look at your current debt as it compares to your income, also known as your debt-to-income-ratio. Often, lenders look for a DTI under 40%—if you’re above that mark they may see you as a higher-risk borrower.
To calculate your DTI, add up your monthly debts and divide that total by your gross monthly income. For example: If your monthly debt payments are $1,000 and your gross monthly income is $5,000, your debt-to-income ratio is 20%. Keep in mind, monthly payments like insurance, utilities, taxes, and recurring home expenses are generally not used to determine debt.
If your DTI is higher than 40%, you can bring the number down by paying off some (or all) of your debt. As you work to lower your DTI, postpone adding any large purchases to your credit cards, as that might cancel out your hard work.
If you’ve just started exploring personal loans, you probably have a ton of questions. Here are some of the most common.
How old do you have to be to get a personal loan?
You have to be at least 18 years old to apply for a personal loan, though it’s important to keep in mind most lenders factor in age, job, and work experience when determining eligibility. If you’re applying for a personal loan before you turn 21, make sure to include a job history.
Are personal loans hard to get?
Getting a personal loan is simple as long as you meet the lender’s requirements for eligibility and are generally flexible with interest rates. However, you want to make sure you’re getting the best rates and terms on your personal loan. Be sure to compare the APR’s offered against several lenders before you sign up. Some lenders, for example, charge application fees and prepayment penalties while others, like LendingClub, do not, which can affect your overall cost.
Do I need a high credit score to qualify for a personal loan?
Though it’s possible to get a personal loan with a lower credit score, a FICO score that is considered good (670–739) through excellent (800 and above) will give you the best chance for approval. High credit scores can also help you get a lower interest rate.
Will lenders look at my assets?
Most personal loans are unsecured, meaning you don’t have to use your assets—like your home, car, or savings account—as collateral. While your lender may ask about your available liquid assets, such as the funds in your checking and savings account, they generally won’t review all of them. If you opt for a secured personal loan, however, you will have to use your assets as collateral (most are backed by a savings account).
Where can I get a personal loan?
Several financial institutions offer personal loans. You can use your flagship bank or credit union or opt for a marketplace or online lender. Comparing rates from both online lenders and traditional banks can help you find the best offer for your needs.
What if my personal loan application is denied?
Each lender sets their own requirements for personal loan approvals, so it helps to compare. However, if you are struggling to qualify for a personal loan you may want to take a step back and see what improvements you can make. If you can, work on your personal finances for a few months—pay down debt or boost your credit score—and then apply again. Just because you were denied the first time, doesn’t mean you will be a second time.
If you think a personal loan is right for you, start by assessing how much you need and come up with a plan to pay it back. Once you’ve checked the criteria for different lenders, do these six things to help you qualify for the lowest rates and best terms.
1. Improve your debt-to-income ratio
Your debt-to-income ratio is a huge factor in determining your loan eligibility. By paying down some of your debt first to improve your ratio, you increase your chances of getting a loan and at a more favorable rate. Start by creating a weekly or monthly budget for expenses and come up with a plan to beat back some debt in advance of applying for a personal loan. If your time allows, a side gig could allow you to make extra payments and help you pay down your debt faster.
2. Precheck your eligibility
While credit inquiries aren’t a huge factor in your credit score—accounting for just 10% of your FICO score—applying for several loans or credit cards at once could signal to lenders that you’re headed for financial trouble. Instead, try checking your rate for a personal loan online with a few different lenders first. Checking your rate online is easy, won’t affect your credit score, and can help determine who is willing to offer you the best rates and loan terms.
3. Compare different lenders
Research is the key to securing a good loan with a favorable interest rate. Take the time to learn the difference between loan offers with different lenders to find the one best for you. In addition to checking with your local community bank, keep in mind that online lenders, online banks and lending marketplaces are the rise and might offer a more cost-effective solution for your needs, especially when you consider interest rates, APRs, and the added fees associated with some of the more traditional banking institutions. Each type of lender—whether that be a local flagship bank or online lending marketplace—will offer different rates, fees, and terms. Compare your options before making a decision.
4. Increase your credit score
If your credit score is lower than 630, focus on increasing it. Do this by making at least the minimum payment on all your bills on time and make sure your credit report is free of any errors that might be affecting your score. If you do find errors, file a dispute with the credit bureau immediately.
5. Don’t ask for more than you need
Keep in mind, you can only qualify for a personal loan you can comfortably afford. If your income isn’t high enough to easily repay the monthly payments, you may struggle to get your loan approved. Try lowering your asking amount. Once you’ve paid off or paid down your loan — or if you receive an income boost — you can always reapply for a second personal loan. In fact, many LendingClub members focused on debt consolidation are repeat borrowers.
5. Consider a joint personal loan
If you need a loan now and your credit history, score or income is not where it needs to be, consider a joint personal loan. With these loans, you and a co-borrower (typically a spouse, partner, or family member) will apply for and sign the loan together. You’ll both be responsible for payments and will both have access to the funds, which can be great if you’re using the loan for something you both need, like home repairs. Many LendingClub members also apply for a joint personal loan to help consolidate and pay down debt. By applying together, the lender will consider both you and your co-borrower's qualifications, which can help push you over the threshold for qualification or get you a larger loan amount than if you applied only on your own.
Understanding the factors that determine personal loan eligibility can help get you in the best situation for approval before you apply. This lets you research the companies that would work best for you without you needing to apply for too many loans, which can maximize your chances of a favorable rate and loan amount. By bringing borrowers and investors together, LendingClub has transformed the way people can access credit. Applications take less than two minutes to apply, and borrowers can receive up to $40,000 in as little as a few days, which has allowed millions of people take control of their debt and invest in their future in an ethical, responsible way ^2^.
^1^ Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.
^2^ The time it takes for a loan to be funded is not guaranteed and individual results vary based on multiple factors, including but not limited to investor demand.