Personal loans can be used for many different purposes. Lenders, including banks, credit unions, and online lenders, offer personal loans. But before you start planning how you will use those funds, you will need to meet lender eligibility criteria.

Learn how factors like your credit score, debt, and collateral can affect whether you qualify for a personal loan.

Credit Score and Credit History

Lenders will take your credit score and credit history into consideration when determining whether to offer you a personal loan. Your FICO credit score is a number from 300 to 850. The higher your credit score, the more likely you will be approved for a personal loan because you will be viewed as a lower-risk borrower.

Credit bureaus calculate credit scores using the information on your credit report. Your credit report includes information on your credit activity, such as how many credit accounts you have, your debt level, your credit mix, and your payment history. It also includes whether you have recently applied for new credit.

You may have slightly different credit scores with each credit bureau because they calculate them in slightly different ways (using proprietary formulas), but the main factors that impact your score are roughly:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)

Income

You need to be able to demonstrate a reliable source of income because lenders want to know that you will be able to repay what you borrow. Minimum income requirements will vary depending on the lender.

You will generally need more than enough income to cover your current debt obligations and your new debt obligations.

Debt-to-Income (DTI) Ratio

Your debt-to-income (DTI) ratio, one of the common five loan requirements of a bank, is calculated as a percentage. It measures your total monthly debt load in comparison to your total monthly income.

A low DTI makes you more attractive to lenders because it indicates you have more available income to repay a personal loan. For personal loans, it is recommended to have a debt-to-income ratio of lower than 36% to improve your chances of being approved for a loan at cost-effective rates—although, in rare cases, lenders may consider a DTI up to 40%.

Collateral

Most personal loans will be unsecured, which means you will not need to provide collateral to be approved. But bad credit may prevent you from qualifying for an unsecured personal loan.

However, you may be able to qualify for a secured personal loan. If you apply for a secured personal loan, you will need to provide collateral to back the loan. Collateral can be a physical asset, such as your vehicle, or a cash deposit.

Origination Fee

When you apply for a personal loan, you will need to pay an origination fee. Lenders charge this one-time fee for loan execution.

The origination fee is calculated as a percentage of the total loan amount. Origination fees vary by lender. They range from about 1% to 6%.

You may be able to pay the origination fee upfront, or it can be deducted from the total amount you are borrowing.

Documents You Need to Include with Your Personal Loan Application

When you are ready to apply for a personal loan, you will need to gather the necessary documents.

The first step to getting a personal loan is filling out a loan application. The application process can be slightly different with each lender, but typically, you will be asked to share personal and financial information that will help the lender determine if you are a good candidate for a loan. You may be able to fill out an online application for some lenders. If you want to get a personal loan from a bank, you may have to complete your application in person. Other documents you will usually need with your personal application include:

• Proof of identity: You will need to provide government-issued ID, such as a driver’s license, as proof of identity.
• Proof of address: Lenders will likely want to see proof of address. While requirements may vary, you can typically use a rental agreement, mortgage statement, or utility bill.
• Employment and other income: Lenders want loan applicants who can pay back what they borrow. You may be asked to provide employment and income verification in the form of W-2 forms or pay stubs.
• Other documents: Once a lender has reviewed your loan application, it may request additional documents such as tax returns and bank statements.

How to Get Approved for a Personal Loan

To get approved for a loan, you can take several steps to improve your financial situation so that you meet a lender’s criteria. Here are some key ways to increase your chances of being approved:

1. Demonstrate steady income: Lenders want to see that you have the ability to repay a loan. Having a steady job and the paperwork to demonstrate a reliable source of income will make you a more attractive candidate for a personal loan.
2. Work on your credit score: Your credit score is a measure of your creditworthiness. The higher your score, the more likely you are to qualify for a loan with better terms. In most cases, a credit score of 640 or higher will give you access to the best loan terms.
3. Avoid late payments: Late payments can impact your credit score. Lenders may consider a history of late payments to be an indication that you do not manage debt responsibly. This could result in your application being denied or your loan having a higher interest rate.
4. Maintain a low DTI: Lenders also look at your DTI to determine your eligibility. A high DTI may indicate that you have overextended your finances and may struggle to pay back a personal loan. Lenders typically want to see a DTI below 36%.
   

What to Do If You’re Denied for a Personal Loan

If you are denied for a personal loan, you will receive an adverse action notice. This notice will explain why your application was denied.

Once you know why you were denied, you can take steps to prepare yourself to reapply successfully. They include:

• Consider other lenders: While one lender may deny your application, you may be able to work with another. Try getting pre-qualified with a few other lenders to compare rates and terms. Pre-qualification will not impact your credit score.
• Check your credit report: If you were denied because of a low credit score, check your credit report. Are there any errors impacting your score? If so, you can dispute those errors and have them removed.
• Pay down your debt: Your overall debt load and debt-to-income (DTI) ratio could be a factor in a lender denying a personal loan. You may need to reduce your debt to meet their DTI criteria before applying for a personal loan again.
• Get a co-signer: A co-signer is someone who agrees to pay the loan if you cannot. A co-signer with good credit could improve your chances for getting a personal loan.
• Consider a secured loan: If you are denied for an unsecured personal loan, you may be able to offer an asset as collateral, such as your car, and qualify for a secured loan.

The Bottom Line

Determine if a personal loan is your best option before you apply, by ensuring you can meet the lender’s eligibility requirements. You can use a personal loan calculator to get an idea of what your monthly payments and the total cost of the loan will look like.

If a personal loan is the right fit for you, you can compare offers to find the best personal loan with a rate and terms that work for you.