How to get approved for a personal loan: Building a strong application

Applying for a personal loan can be a stressful process — you may not know what a lender’s criteria are, or how strong your chances of qualifying to borrow are. Understanding the considerations creditors make when assessing your creditworthiness can help you to build a stronger application and improve your chances of being approved.

Every lender carries its own requirements for personal loan approval–  conditions that measure the potential risk of taking you on as a borrower. Before starting the application process it is important to consider what these requirements tend to be, and how your standing will impact your rates. This way you can avoid the paperwork for lenders you may not qualify with.

Personal loan qualification requirements

Before a lender approves your application, you must first meet that lender’s specific qualifications. Some require a certain credit score or income. Other lenders have expanded underwriting criteria and take education or work history into consideration. When you set out to find a personal loan, keep the potential eligibility criteria in mind.

Credit score and report

Both your credit score and credit report will be used to measure your creditworthiness. Your FICO credit score is based on your payment history, amounts owed, length of credit history, new credit and credit mix. While there are several credit scores available, FICO is used by about 90 percent of the top lenders.

While your score is a snapshot, your credit report is an in-depth look at your financial history. There are three reports, one from each of the main three credit bureaus — Experian, Equifax and TransUnion. The reports share information regarding your current credit situation along with any loan history or previous credit accounts. Your score is based on the information found on the reports.

When applying for a personal loan, you will undergo a hard credit pull. This is how lenders look at your full credit report. A hard pull can temporarily decrease your score. When applying for prequalification, though, you will undergo a soft pull where lenders just look at your credit score.

Payment history

Your payment history is a major consideration when lenders review an application. Lenders want to see a consistent track record of making on-time payments and managing debts responsibly. This helps lenders determine your creditworthiness. A history checkered with late or missed payments will be a red flag to potential lenders. It will likely cause lenders to view you as a risk.

Payment history is also a significant part — 35 percent — of your overall credit score. According to FICO, “research shows that your track record of payment tends to be the strongest predictor of the likelihood that you’ll pay all debts as agreed to.” However, one or two missed or late payments will not cause your score to take a nosedive as long as the rest of your history involves on-time payments.

The types of accounts used to track your payment history typically include credit cards, loans, mortgages and car payments.

Income

Most lenders require a certain income in order to qualify for a loan. While this threshold is not always disclosed, it can be helpful to gauge where you fall in that lender’s measure. If your income is on the middle to low side it is wise to start your personal loan shopping journey with lenders that disclose an income close to yours.

Similar to credit, income is used to measure risk. From the perspective of a lender, borrowers with a high income have a higher likelihood of paying back the loan. Low income, on the other hand, may equate to higher rates because of the risk that lenders would be taking on.

Debt-to-income ratio

A borrower’s debt-to-income ratio is the percentage difference between your monthly debt payments and your monthly gross income. Lenders factor in this number as a measurement of how likely you are to be able to pay all of your debts each month. The higher your DTI ratio, the more of a perceived risk it is to lend to you — which in turn can result in higher rates.

To calculate your debt-to-income ratio, take the following steps.

• Add up all of your monthly debts — student loans, personal loans, rent or mortgage payments, auto loans, alimony, child support and credit card payments.
• Divide that number by your monthly income.

To find your DTI without having to do any mental math, take advantage of a DTI calculator that can handle the heavy lifting.

Collateral

There are two primary types of personal loans: secured and unsecured. While both of these can be used for the same types of purchases, secured loans require collateral whereas unsecured loans do not.

Personal loans tend to be unsecured, but if you are interested in a secured personal loan, like the ones offered by lenders like Upgrade or Best Egg, it is important to consider how collateral will impact your chances of approval. Collateral in its simplest form is some sort of asset, like a home, cash or a vehicle that can be used to help qualify for a specific loan.

For example, if you didn’t pay your loan and your vehicle was used as collateral borrowing, the lender may repossess your car. These types of loans tend to carry lower interest rates and are easier to qualify for because the lender can recoup losses by seizing the security if the borrower fails to pay.

How to meet a collateral requirement: Options for collateral can be large, like a house, car or boat. They can also be smaller, like antiques, fine art or jewelry. Either way, consider the risk of default that comes with using your chosen asset.

Alternative considerations

Many lenders — like Upstart, for example — have expanded the measure of risk outside of traditional credit scores and use additional underwriting criteria. Your education or employment history may support your application if your credit score falls short. This is a fantastic feature for borrowers who might not have a long credit history or who are applying for their first personal loan.

Unlike other requirements, these are not essential but instead are additional factors that a lender may take into account. One example is secondary education — while it is not required to have a degree, a lender may count it in your favor and thus better your chances.

Personal documents you need to take out a loan

As part of the personal loan application process, you will be required to provide personal information and documentation. Though the specifics may vary from lender to lender, in general you can expect to provide:

• Proof of identity: This can include a birth certificate, certificate of citizenship, driver’s license, passport, Social Security card or a state-issued ID.
• Income verification: Income can be verified using pay stubs, bank statements, tax returns or 1099 forms if you are self-employed.
• Proof of address: Lenders may also seek to determine how stable your living situation is by asking for proof of address. Documents that can be used include utility bills, lease or rental agreements, property tax bills or bank and credit card statements.

The good news is most of these documents can be submitted electronically, making it easier and quicker to comply with the lender’s requests.

Once you can qualify, shop around

Gaining approval for a personal loan varies by lender but understanding common requirements can help on the front end of the process.

It is important to compare at least three lenders to determine which you qualify for and which best fits your needs. Pay close attention to repayment options and any unique features lenders offer when making your final choice.

How to apply for a personal loan

Take the following steps when applying for a personal loan.

• Determine the amount of money you wish to borrow: Keep your objectives in mind: are you consolidating other debt? Covering a specific expense? You will be paying interest, so borrow what is needed but not more.
• Check your credit score: Knowing your score before you apply for a loan can help you to borrow at the most favorable terms for which you qualify.
• Apply for loan prequalification with at least three lenders: This tentative commitment can help you to know whether or not you qualify to borrow from specific lenders. You’ll also obtain an estimate of your rates and monthly payments.
• Compare loan rates and terms: Prequalifying will allow you to see the rates and terms each lender is willing to offer– and you can determine from there which would be the best fit for your situation.
• Submit your loan application: Once you have decided which lender to go with, finalizing your application will trigger a hard credit check. The lender will then accept or deny your loan and, when approved, process funds.

When to hold off on applying

While unexpected expenses are bound to crop up, applying for a personal loan is not always a financially sound decision. If you do not qualify for a competitive interest rate, it may be better to forego this type of loan altogether. As alternatives, you may consider a home equity loan or personal line of credit.

If your options are limited and you are in an urgent situation, consider looking into personal loans for poor credit, for which lenders tend to loosen eligibility criteria. Though these loans tend to have more lenient eligibility, understand that the rates and terms are often less favorable than those for more traditional loans.

What to do if you are denied a personal loan

Being denied credit can be a frustrating experience. If your application for a personal loan is denied, there are steps you can take to improve your financial situation and boost your chances of future approval.

Review your score

One of the most effective ways to strengthen your chances for approval is to work on polishing your credit profile and raising your credit score. Focus on consistently making all of your debt payments on time and paying down outstanding balances.

To get started on this effort, request a copy of your credit report and identify any problem areas.

Increase your income

Another major factor in a lender’s review process is your income. A higher income will make you more appealing to lenders and can also lower your overall DTI ratio.

Perhaps it’s time to ask for a raise from your employer or find a side hustle that can bring in extra cash each month. Taking these steps before applying for a loan again in the future can increase your chances of success.

Shop around

Not all lenders have the same credit score or income requirements. Some may have a more flexible or holistic application process that takes other factors into consideration beyond income and credit profile or that allows for lower credit scores. Some lenders even specialize in working with clients to help repair credit.

No matter which steps you choose to take after being rejected for a loan, it’s best to wait a minimum of 30 days before applying again. Loan applications involve a hard credit check and each application will have a temporary impact on your credit score. To give yourself the best odds, consider waiting at least six months between applications and spend that time improving your finances.