Requirements to Get Your Personal Loan Approved

For the right consumers, personal loans can be a quick way to get much-needed cash for anything from a home repair to a college tuition. With the right qualifications, you can be approved for a personal loan in the morning and have the cash deposited into your account in as little as one day depending on the lender.

While applying is easy, qualifying for a personal loan may be more difficult. Here’s what you need to know about personal loans and how to get approved for one.

What is a personal loan?

What are personal loans used for?

How do I qualify for a personal loan?

How to apply for a personal loan

Lenders with alternative qualifications

What if you are rejected for a personal loan?

Personal loans come in a wide range of amounts and interest rates. The terms of personal loans vary by lender and range from six months to 84 months as of Feb. 2, 2018. They can be for as little as $2,000 and as much as $100,000, although the majority of personal loans are for much less. Ritterbeck said that [BesteggPL]Best Egg[/BesteggPL]s’ loans average between $13,000 and $14,000.

Unlike a mortgage, which is a loan for a house, or an auto loan, which must be spent on a vehicle, personal loans can be used for almost anything.

“People use it for a ton of reasons, from home repairs to medical [expenses] to all kinds of major purchases,” Ritterbeck said. People most commonly take out personal loans, however, for debt consolidation. In this process, borrowers use a personal loan to pay off other high-interest debts, which can simplify and reduce their monthly debt payments.

“You can’t always control when you have a major expense, but you can make good decisions,” she said. [LendingClubPL]LendingClub[/LendingClubPL]’s borrowers primarily use personal loans to pay off high-interest debt, unexpected expenses such as medical bills or car repairs or a planned expense such as a vacation or home remodel.

Most lenders will look at two factors when you apply for unsecured personal loans: your credit history and your ability to repay the loan. Borrowers don’t have to provide collateral, such as a house or car to back their loan, nor do they need a cosigner (unless a cosigner is needed to strengthen your odds of getting approved).

Instead, lenders will look at your personal credit history and other factors, such as your income.

“That makes it easier for us to provide you quicker and easier access to your loan in comparison, to say, a mortgage loan that requires an appraisal of your home,” Dudum said.

Here’s a breakdown of how lenders determine whether you qualify for a loan.

Each lender will determine its minimum credit score for receiving a personal loan, and some are more lenient than others regarding what scores they will accept. For [BesteggPL]Best Egg[/BesteggPL], for example, the average credit score for qualified applicants is 710. Ritterbeck said that most conservative financial institutions are comfortable issuing personal loans to applicants with scores around 680 and above.

Your credit score matters because it is a reflection of your ability to repay a loan. The score is compiled from information gleaned about how you handle credit, which could include:

It’s important to note that your credit score will change over time as credit reporting agencies collect more information and tweak their calculation models. That means your score could be different from one month to the next.

Each of the three reporting agencies will provide one free credit report a year, which you can get by visiting AnnualCreditReport.com or calling 1-877-322-8228.

First, look for errors on your credit report, where you may find information that is inaccurate or wrong. If you find errors that could have lowered your credit score, dispute the error with the appropriate credit bureau. Check all three reports.

Then, take a look at your financial situation and make some changes.

The length of time it takes to improve your credit score depends on why your credit score is low in the first place. In any case, the personal financial discipline you develop as you work to improve your score will leave you with better spending and saving habits.

Your DTI is the amount of monthly debt obligations you have, including credit card payments, auto loans and student loans, divided by your monthly gross income. The calculation shows lenders the percentage of your income that you use to pay off debts.

“Lenders see this as an indicator of your ability to comfortably take on and pay off more debt,” Dudum said.

Wells Fargo lists a DTI of 35 percent as “looking good” and indicating that your debt is manageable in relation to your income, and that you likely have spending money left over after you pay your bills.

If you have a DTI between 36 and 49 percent, you may want to improve your financial situation so that you are in better shape to handle extra expenses. If your DTI is in this range, lendersmay look at additional eligibility criteria, like your income or whether you have a cosigner.

Credit utilization rate: This rate is calculated by dividing how much credit you’re using (the statement balance for each of your accounts) by the amount of credit you haveaccess to. “If it’s higher than about 30 percent, many financial companies see this as an indicator that you might not be as responsible as you could be,” Dudum said.

Credit history: How you’ve managed debt in the past can be a good determinant for how likely you are to pay back a personal loan. That means if you have little or no credit history, lenders may not approve your personal loan application.

“If you don’t have a track record with credit, it’s difficult for lenders to guess how you might handle paying your debts,” Dudum said.

Typically, cosigners are trusted friends or family members with good credit who will agree to take responsibility for the loan if you can’t make the payments. Lenders will factor in your cosigner’s credit history and credit score rather than yours when determining whether you qualify for the loan, which will up your chances of qualifying and securing a good interest rate.

Proceed with caution when considering a cosigner. If you don’t make your loan payments, you could ruin your cosigner’s credit history, stick them with the balance of the loan, and wreck your relationship with your cosigner.

The application process for an unsecured personal loan is simple and fast.

“The old way is you’d walk into your local bank, wait in line to speak with a loan officer and apply that way,” Ritterbeck said. “In a lot of cases today you can still do that, but you also can go online, and in some cases call, and get a decision in a couple of minutes of what options are available to you.”

After you receive options for a personal loan, including the amount you qualify for and the interest rate, you can choose one to apply. “Generally speaking, the better your credit profile, the lower the rate of interest you’ll be charged in exchange for borrowing,” Dudum said. “That said, there are many other factors we take into consideration. One number couldn’t tell your whole financial story.”

Interest rates vary, but they can be as high as each state allows. [OneMainFinancialPL]OneMain[/OneMainFinancialPL], for example, can offer interest rates as high as almost 36% on personal loans, and [BesteggPL]Best Egg[/BesteggPL]’s highest rate is 29.99%.

Once you decide which loan to apply for, you’ll need to submit proof of employment and income, such as a pay stub, said Kim Wijkstrom, chief marketing officer for [OneMainFinancialPL]OneMain Financial[/OneMainFinancialPL]. Decisions on the loan can come within the hour, and the money could be deposited in your account the same day.

Not all lenders follow the typical formula for personal loan requirements. [OneMainFinancialPL]OneMain[/OneMainFinancialPL], for example, uses credit scores as a guideline that gives a picture of a consumer’s credit history and focuses more on the applicant’s income and debt obligations, Wijkstrom said.Here are others:

You may not qualify for a personal loan the first time you apply, but it is possible to improve your financial position and successfully qualify later.

“People are of course usually very disappointed if they don’t get a loan, and the first thing to address is the emotional response,” Wijkstrom said. “Don’t be defeated when rejected.”

At [OneMainFinancialPL]OneMain[/OneMainFinancialPL], financial advisers will talk with clients about why they were not approved and what they can change. Sometimes that means fixing their credit history, such as paying bills on time for a set period. Others may find errors on their credit report that hurt their chances of qualifying for a personal loan.

You may also want to look into other options for credit, such as equity in your home that could help you get a different kind of loan, Ritterbeck said.

When used wisely, personal loans can help you get out of debt and manage large expenses. Regardless of when you need a personal loan, it’s never too early to integrate good habits into your financial life to ensure that when you do apply for a personal loan, you will qualify for the amount you need.