If you’ve recently looked at personal loan eligibility requirements and are stunned at how much lenders have tightened, you’re not alone. Many consumer lending products — like personal loans — have hiked requirements in an attempt to offset risk brought on by economic insecurity.

On top of the economic trends affecting the lending market, unsecured personal loans can be difficult to get approved for in general. Many lenders and financial institutions require at least a good credit rating, a healthy credit report and a stable income to get approved.

Reasons for personal loan rejections

While every lender differs in its exact acceptance criteria, most lenders across the board all look at the following financial factors when determining approval.

  • Less-than-stellar credit score: Low — or bad — credit is often one of the first things that lenders look at when determining creditworthiness. A bad score often indicates a rocky repayment history with past debts, which lenders typically see as a potential risk factor.
  • Thin credit history: Regardless of how high your credit score is, the shorter your credit history, the harder it will be to get approved. Your credit history is a record of your activity, including repayment history.
  • High debt-to-income ratio: Your debt-to-income (DTI) ratio is a percentage of how much debt you have compared to your gross income. Most lenders look for DTIs under 36 percent, but can be lenient. A DTI over 50 percent, however, will most likely not get you approved for an unsecured loan.
  • Lack of stable income proof: While not every lender has a minimum income requirement, many do require that the applicant has a steady stream of income. Some lenders only allow for one income on the application, while others allow for multiple streams.
  • Multiple recent hard credit checks: Everytime you apply for a line of credit or loan, the lender initiates a hard credit check. A hard check stays on your report for up to two years and will initially knock your scores down a few points. While hard-checks aren’t inherently bad, multiple checks in a short period of time lowers your score.

Why it’s been harder to get approved for a loan

Borrowers with good to excellent credit are still most likely to get approved for a loan, although the rates offered are likely to be much higher than they would have been last year.

The cost of borrowing has greatly increased as lender’s adjust to the Federal Reserve raising the benchmark rate. What’s more, lenders have also become more selective about who qualifies for approval as the inflation rate remains stubbornly high, despite the Fed’s recent behaviors.

How the federal reserve impacts personal loan interest rates

The Federal Reserve has been raising interest rates at a historic speed in recent months, which subsequently impacts the cost of borrowing. Up until the last FOMC meeting, the Fed has raised rates a record-breaking 10 times in a row. This has led to the average personal loan rate hovering around 11 percent.

For context, the benchmark Fed rate in July of 2022 was between 2.25 and 2.5 percent. The current benchmark rate is between 5 and 5.25 percent, which is the highest it’s been since 2007.

However, these rate increases only impact variable-rate and new personal loans. Most personal loans are fixed, meaning that the interest rate doesn’t change from origination to the day you pay down the balance.

Borrowers who have an existing, fixed-rate loan won’t see any changes to their interest rates; only those trying to take out a loan now and those with variable loans will feel the impact of the Fed’s behavior.

How to get a personal loan with bad credit

If you’re in need of a personal loan sooner than later and don’t have the time to build or improve your credit, there are a few ways that could increase your approval chances.

Prequalify for as many lenders as possible

Every lender, including those that cater to low-credit borrowers, have different eligibility requirements. That being said, compare as many lenders and companies as possible through prequalification.

Prequalification is offered by many lenders. It allows you to check your eligibility odds and predicted rates without impacting your credit.

Consider adding a cosigner or joint applicant

Prequalification makes it easier to sift through lenders to find the ones you’ll get approved for. If you don’t meet most lenders’ requirements or are continually offered sky-high rates, check to see if joint applications or cosigners are offered.

Joint applicants and cosigners are creditworthy family members or friends who sign the loan agreement with the primary applicant and take on equal legal responsibility for the loan.

Many lenders offer this option and it can increase your chances of approval and odds of scoring a more favorable rate. However, if you happen to miss a payment, your cosigner is responsible for recouping the balance and their credit score will also take a hit.

Consider the potential relational risks before enlisting the assistance of a joint applicant or cosigner and make sure that the monthly payment is well within your budget, both now and in the future, to avoid negatively impacting their credit as well as yours.

Frequently asked questions about getting approved for a personal loan

  • To increase your chances of getting approved for a personal loan, do your research and make sure that you have the following.
    • A good credit score or one that at least meets the lender’s minimum requirement.
    • A positive repayment history.
    • A steady stream of income or the required minimum income if listed.
    • A low debt-to-income (DTI) ratio or one at least under 50 percent.

    Sufficient collateral if applying for an unsecured loan.

  • Your application could have been rejected for a number of reasons; for example, you didn’t meet the lender requirements or your credit history or score is too thin. You can also contact the customer service department; they may be able to indicate why you didn’t qualify.
  • A bad credit, unsecured personal loan is typically the easiest to get approved for. Unsecured loans require a form of collateral — that can be seized if you don’t make the monthly payments — to back the balance, so lenders incur less risk than they do with secured loans.
  • The application and funding process is typically a simple process and can be done in as little as one to two business days, depending on the lender. However, it can be hard to get approved if you have a thin credit history or a less-than-ideal score. Most lenders have a credit minimum that falls within the good to excellent score range.