Every lender carries its own requirements for personal loan approval, these conditions measure the risk that taking you on a borrower may incur. 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 that you may not qualify with.

Personal loan eligibility 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 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.

Your credit report on the other hand is an in-depth look at your credit 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. The scores you receive are 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.

How to meet credit score and report requirements: Before applying for a personal loan it is smart to work to improve your credit by paying down remaining debts and keep your credit utilization rate low. While every lender holds its own requirements, generally a score in at least the mid 600s is needed.

Income

Most lenders require a certain income in order to apply, while this number 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.

How to meet income requirements: The key here is to only consider lenders that your income fits into. Some lenders have income requirements of under $15,000 annually, while others require $50,000 or more.

Debt-to-income ratio

A borrower’s debt-to-income (DTI) ratio is, as it sounds, 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, 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 which will handle the heavy lifting.

How to meet the debt-to-income ratio requirement: There is no perfect percentage but lowering your DTI ahead of applying for a loan is a good idea.

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 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 approval. Collateral in its simplest form is some sort of asset, like a home, cash or a vehicle, that can be used to qualify for a specific loan.

So, for example, if you didn’t pay your loan and your vehicle was collateral you might lose ownership. 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 that might not have a long-term history or credit or are applying for their first personal loan.

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

How to apply for a personal loan

Take the following steps when applying for a personal loan.

  1. Figure the amount of money you wish to borrow.
  2. Check your credit score.
  3. Apply for loan prequalification with at least three lenders.
  4. Compare loan rates and terms.
  5. Submit your loan application.

When to hold off on applying

While unexpected finances are bound to come up, applying for a personal loan is not always a financially sound decision — especially if you could end up in a precarious spot. It is wise to forgo financing if you lack the basic qualifications. Instead, consider alternatives, like a home equity loan, retirement loan, personal line of credit or credit card.

By holding off on applying and instead working to improve your credit or reduce your DTI, for example, you will receive more favorable rates in the future and not incur additional debt. If you are in an urgent situation consider checking out personal loans for poor credit, where lenders will be less stringent.

Once you can qualify, shop around

Gaining approval for a personal loan varies by lender but understanding common requirements can help when your search begins. When that time comes, it is important to compare at least three lenders to determine which you best qualify for and that best fits your needs. Pay close attention to repayment options and any unique features that lenders offer when making your final choice.