The criteria for personal loans are fairly consistent across lenders, though individual lenders may have unique qualification standards. For instance, both lenders may assess your credit score, but one might need a higher score than the other. Some other standard requirements that they may look into include:
- Credit score and history
- Income
- Debt-to-income ratio
- Collateral
- Origination fee
1. Credit Score and History
Your credit score plays a pivotal role in a lender’s decision-making process when evaluating a loan application. Scores range from 300 to 850 and depend on factors like payment patterns, outstanding debt, and the duration of credit history. While a minimum score of roughly 600 is a common requirement, some lenders might even approve applicants with no credit history.
2. Income
Income criteria ensure that borrowers have the means to pay back a new loan. The minimum income prerequisites fluctuate between lenders, and some may not reveal these details. Documentation to verify income can be recent tax returns, monthly bank statements, pay stubs, or employer-signed letters; self-employed applicants can use tax returns or bank deposits.
3. Debt-to-Income Ratio
The debt-to-income ratio (DTI) signifies the fraction of a borrower’s monthly gross income allocated to debt payment. To forecast an applicant’s ability to handle new and existing debt, lenders prefer a DTI under 36%. However, a highly qualified candidate with a ratio up to 50% might still be approved.
4. Collateral
For secured personal loans, lenders will ask for valuable assets as collateral. Whether it’s for homes or cars, the collateral usually corresponds to the loan’s purpose, but it can also include cash accounts, investment accounts, real estate, or valuable collectibles. If you default, the lender can seize the collateral to recover the remaining balance.
5. Origination Fee
Although not a qualification factor, origination fees are often demanded by lenders to cover application processing and other associated costs. These fees typically range from 1% to 8% of the total loan sum, based on the credit score and loan amount. Some lenders may collect or subtract these fees at closing or include them within the loan amount.
4 Key Personal Loan Documents
When applying for a personal loan, lenders may request specific documents to validate everything from your identity to your residence and employment. These typically include:
Loan Application: Lenders need this formal document filled out to initiate the lending process. The application’s content and format can vary by lender, including online applications, phone discussions, or paper submissions at brick-and-mortar banks.
Proof of Identity: Applicants must present at least two types of government-issued identification, like a South African ID or passport, to confirm age and citizenship and mitigate identity theft risk.
Employer and Income Verification: Lenders need proof of your earnings and employment history. This may include pay stubs, tax returns, bank statements, employer contact details, or, for self-employed individuals, bank statements, 1099 forms, and tax returns.
Proof of Address: Evidence of a stable residence might include a utility bill, lease copy, voter registration card, or an insurance document displaying your address.
How to Qualify for a Personal Loan
Qualifying for a personal loan varies by individual, but common guidelines include:
- A credit score of at least 670
- Stable monthly income
- DTI ratio under 36%
Each lender’s requirements differ, so prequalifying and consulting directly with lenders about benchmarks is advisable.
How to Prequalify and Get a Personal Loan
Prequalification allows you to explore potential rates and terms without impacting your credit score. Comparison among multiple lenders can help you find the best fit. When ready to apply, consider these steps:
- Check and possibly enhance your credit score
- Determine your borrowing amount
- Prequalify with lenders
- Submit a formal application
What If Your Personal Loan Application is Denied?
If denied, you can:
- Seek the specific rejection reason
- Go through and fix any issues raised in your application
- Reduce current debts to boost your credit score
- Verify your credit report for mistakes
- Increase income or consider a smaller loan amount or co-signer
By comprehending these aspects of personal loans and following the outlined steps, you can navigate the process efficiently and enhance your likelihood of approval.
