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A personal loan is one of the easiest ways to borrow money. You don’t need excellent credit, a 6-figure income or an asset such as a home or car to secure the financing.
If fact, you can get a personal loan with not much more than a signature, although you will pay a higher interest rate for this variation.
The 1st step to qualify for a personal loan is to make sure it’s the right loan for your situation, says Stephanie Cutler, vice president of personal lines and loans at Wells Fargo in San Francisco.
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What to use a personal loan for
A personal loan is an unsecured fixed-rate installment loan, usually for $3,000 to $50,000, although some lenders offer personal loans as small as $1,000 or as large as $100,000, according to Wells Fargo, PNC Bank and others.
The personal loan always has a set monthly payment and an end date when it will be paid off. Interest rates vary, depending on the lender and how well qualified the borrower is.
If you plan to use the money you want to borrow for real estate, a car, education or a business, you might be better off with a loan that’s specific to that purpose.
The most common uses of a personal loan are to consolidate debts such as multiple credit cards or pay for a big one-time expense such as a wedding, medical bills, funeral or trip-of-a-lifetime vacation.
“There are a host of uses that are very much acceptable,” Cutler says.
Ability to repay
Most lenders will look primarily at your credit score, credit history and debt-to-income ratio to determine whether you’re qualified for a personal loan, and if so, how much you can borrow and at what rate, according to Wells Fargo.
- Your credit score might be a FICO score, another brand of credit score or the lender’s own proprietary credit score.
- Your credit history, pulled from 1 or more credit bureaus, shows how many credit lines you have open, your credit utilization and your repayment history, among other factors.
Your debt-to-income ratio is a calculation that measures your ability to manage your debt based on your income and how much you owe.
“We’re looking to see what debt they’re carrying, who they’re carrying that debt with,” Cutler says. “Is it revolving debt, credit card debt, a combination of loans and credit card debt?”
College, career sometimes matter
Some lenders also look at other factors.
An example is Upstart, which starts with your credit score, credit history and debt-and-income situation. Then it adds your education and career to the mix. Data points might include your college, grade-point average, your major and current job title, says Mike Osborne, chief marketing officer at the San Carlos, California-based company.
The idea is that certain careers and jobs have more stability if the economy sours, making the borrower better able to continue to repay their personal loan. A person’s job is also viewed as a proxy for risk tolerance and personality characteristics that might affect whether the loan will be repaid.
Other factors lenders might consider include how you plan to use the funds, how you contacted the lender and even your social media presence.
Osborne won’t reveal the ‘secret sauce’ of exactly which variables are weighed, but he says Upstart has used social media to approve and reject some personal loan applications.
“It can provide a very positive signal that helps us understand that person,” he says.
Are payday loans a factor?
Some lenders also check out your bank accounts and lines of credit that aren’t reported to the credit bureaus, says Briana Fabbri, head of marketing at online lender NetCredit in Chicago.
Short-term loans, sometimes called “payday loans,” are an example of a credit line that usually isn’t reported.
Even though some lenders use alternative types of data to supplement their loan decision-making process, borrowers shouldn’t underestimate the value of their credit score, Fabbri says.
“It’s not the end-all and be-all,” she says. But it is “a crucial piece that they need to pay attention to and focus on.”
There won’t be much paperwork
Most lenders can retrieve your information electronically once you give them permission, Osborne says. Documents that they might look at include W-2s, income tax returns, bank statements and college records.
In some cases, the lender already knows a lot about your financial situation.
“Often, the customer has a deposit relationship with Wells Fargo or maybe a deeper relationship, and we may have a lot of that information already,” Cutler says.
The exception to all these requirements is the so-called signature loan, a lending vehicle that uses the borrower’s signature and promise to pay as collateral.
With this type of personal loan, the lender doesn’t ask for or verify much information beyond your identity. In lieu of the paperwork, you’re charged a higher interest rate to offset the risk that you might not be creditworthy.