Personal Loan Requirements You Should Know Before Applying

Personal Loan Requirements You Should Know Before Applying

Personal loans are the sums of money received for different individuals’ purposes and given quickly to cover their burning needs. The size typically ranges from $1,000 to $50,000 (rarely more). For users with a clean history, it is a pretty easy way to cover a financial emergency or consolidate credit cards debts with high-interest percent. 

As a rule, applicants must meet certain requirements to secure personal loans. These requirements include your past payments, credit score, and income details and are carefully examined. So, before applying, you must div out what loan eligibility you can have. 

While it takes effort and time, this move can save you from senseless applications or redundant document work. Read on to see the details on all the key requirements for anybody wishing to take out a personal loan. 

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What Personal Loan Requirements Are? 

Now, you have to be ready that personal loan requirements will vary from lender to lender. But most of them ask for similar kinds of data or get it automatically from other sources you are aware of. 

This information gives them a clear understanding of your financial situation and how capable you are of repaying the loan. That is what personal loan requirements are meant for. As a rule, applicants collect documents to present to the lender, including those that prove their identity, home address, steady income, and previous credit manipulations and credit score. The appropriate papers should be gathered in advance. Let us look at each of these requirements under a microscope. 

Credit Score

Currently, a credit score is the big pillar holding the whole application process together. This is the most important of all the requirements and a factor with a huge role in indicating how credit-worthy you really are. High credit scores are more than half of an application’s success, whereas a bad credit score will make the lender take a protective position and hold back the most competitive rates from this kind of applicant. 

The credit score is a 3-digit number between 300 and 850 and is formed with the help of your payment history, length, and amount of the so-called ‘outstanding debt.’

It is generally considered that these scores correspond to the following credit score ratings:

Score type Score Points
Bad  300-629
Fair 630-689
Good 690-719
Excellent 720-850

Users of credit money with a score less than 650 are considered bad credit and are very unlikely to qualify for a loan, especially of significant size. Fair scores starting from 680 have more chances while good and excellent credit score numbers open wide possibilities for borrowing. Lenders usually ‘peep into’ your credit score by conducting a hard check including many things starting from credit card debts and ending with how long you’ve had debts

Payment History 

All past credits and how well you managed to pay them off matter too. It carries a special meaning at the point when the lender determines your overall score. In fact, payment history makes up nearly 35% of FICO scores and is even named ‘the most important credit factor’, according to Forbes. 

It includes: 

  • The number of past due loan payments on credit reports (and how frequently late payments were made)
  • Individual payment account info
  • Details on how late delinquent payments were made 
  • Amounts of debt
  • Public records of different types such as lawsuits or bankruptcies
  • For how long each of the existing delinquency or collection item has been attached to your general credit report
  • Number of accounts that are compliant with all credit and loan terms

If the lender has no reason to doubt that you will miss payment due dates, don’t worry. But what transaction history do you need to have to qualify for a personal loan? There is no specific measurement of this, but make sure that you:

Pay debts
  • Make loan payments according to the set schedule / allow autopay from your credit card or bank account. 
  • Manage your debts or use a debt consolidation loan (such as credit cards debts)
  • Be current on all payments and get back on track as soon as possible
  • Clearly communicate with the lender

Income

Income

Income is measured just to know if you are able to pay off a newly taken loan. Whereas many companies don’t even include a specific minimum income amount per year (and that is perfectly okay) in their personal loan requirements, some might have set-in-stone sums. For example, the requirements of the popular company SoFi are at least $45,000 per year as a lower acceptable income. 

Together with the evidence of regular income, you might be asked about tax returns or pay stubs from your chef. In case you are self employed, you will only disclose tax returns or bank deposits. 

To have the accurate data on your income, the lender will include one of these documents in their requirements:

  • Latest bank statements that show min. your 2 last salary deposits
  • Two of your recent payslips
  • A payslip where it is stated how big your yearly income was for two last pay cycles 

Debt-to-income Ratio

DTI which stands for debt-to-income ratio is the terms reflecting the amount of a borrower’s monthly income (gross income, in this case, i.e. including salary, pensions, interests, and rental income). In simpler words, it is how your income compares to the debt load. 

Debt-to-income ratio is calculated with the same purpose – to see the client’s ability to repay a new and current debt. With most lenders, a ratio of 36% will be enough, whereas some companies who want only borrowers with high repaying capabilities can demand a DTI of nearly 50%. 

How to count if your DTI is enough or not? 

Explain what the debt-to-income ratio is and how it is calculated.

  1. Add all your current debt payments per month. 
  2. Divide this number by your gross income. 
  3. Take the result and convert it to percent. (*just multiply it by 100). This will be your debt-to-income ratio. 

Collateral 

Collateral is required only if the loan is secured – backed up by something that has monetary value. For a secured personal loan, there can be several versions of collateral:

  • Auto
  • Cash at a savings account or at a CD (certificate of deposit) account
  • House
  • Stocks and bonds
  • Collectible items
  • Luxury jewelry
  • Precious metals such as gold and platinum
  • Fine art pieces, etc. 

Collaterals are great, first of all, for lenders. They let them feel safe when extending the lending period and protect financial stakes in case the borrower doesn’t repay the loan in its full size. As for the part of the borrower, it’s also a good thing for them too as it lets a person obtain a personal loan more easily, especially if they have an imperfect credit history and a low score, don’t meet all the requirements, or have no credit history yet. Plus, they can get a lower interest rate. 

Personal Loan Documents Your Lender May Require 

Have you seen someone getting a loan without doing exhausting paperwork? We haven’t either. Normally, the lender will ask you to show them a set of documents. They will need to check many things from your identity and residence to work place. 

These are the most often required papers you should provide. 

Loan application 

The first document on this list is a loan application. Complete and submit this paper to start the application process. There, you should provide some basic personal information, desired loan amount, and the goal of having this loan. 

The format will vary from lender to lender. These days you will most certainly apply and send the request online. However, some may need to discuss all the details over the phone. In Europe, some cases may need to come to company branches in person only. Be ready to give other details on your personal finances because they can be crucial too (such as your mortgage or rent payment amounts and terms). 

Proof of identity

For the loan providing to happen in compliance with the law, the company will also check your identity to see if you are a citizen of the US or a permanent resident and if you are who you claim you are. You will also need to give your passport details. Other information which is normally included in the proof of identity is:

  • active bank accounts
  • the state issued ID
  • military ID
  • birth certificate
  • Social Security card
  • certificate of citizenship

Lenders don’t demand originals of these documents, so just make several copies and do your best not to confuse them with originals. 

Employer and income verification 

If you opt for an unsecured loan and don’t have collateral to support you when applying, then the lending firm needs to check your other details. Proving that you have a source of income and are going to repay the money in the stated terms is the next step in such cases. 

Those employed in a conventional way can verify their income by showing the following documents:

  • Paystubs
  • Tax returns
  • Bank statements
  • W-2s and 1099S
  • Contact data of employer

Self employed customers can provide only these:

  • 1099S
  • Bank statement
  • Income tax returns

To find the necessary tax forms, you should log in the database e of your active payroll provider or get in touch with your HR department. CPAs and tax experts are also able to give relevant forms.

Try also to get bank statements by logging in your bank account or contacting your bank if there are no statements in the open access. 

Proof of address 

A client’s living situation also shows what kind of person a borrower is and how stable financially they are. As a rule, to prove your address, you need to disclose one of the following papers:

  • Rental agreement or lease
  • Voter registration card
  • Utility bill
  • Proof of your home insurance (or proof of vehicle or rental insurance)
  • Your house tax receipt
  • Bank statement

Still, often borrowers need a change of address confirmation. To get it, turn to the US Postal Service. This organization helps to confirm and change residential addresses. Do it online or come to the local post office department. 

How to Apply for a Personal Loan

If the situation tells you that obtaining a personal loan is the right decision and you will feel at ease repaying it, then it makes sense to try and submit an application. This is a good option if you need msourcesntly as the funds can be available right on the next business day.

To apply in a correct way, follow the simple guide consisting of a few steps. 

Step 1. Check the credit score

Step 2. Choose loan type

Step 3. Shop around for the best personal loan rates

Step 4. Pick a lender and apply

Step 5. Provide necessary documentation

Step 6. Accept the loan and start making payments

Review your credit score and see if you qualify for the loan. There is a simple trick to do it with no hard check influencing your credit score. Just make an account on Lending Tree or Annual Credit report and see it counted. 

All in all, it’s a useful habit to review credit reports every year. This will help you know the exact debts and bank accounts affecting your score. One of the simplest and fastest ways to improve this score almost overnight is to pay off a debt in a conventional way until the score improves enough to let you qualify for the desired amount. 

What concerns paperwork, keep them in order both physically and electronically to apply without headache. It’s also handy to make a calendar with payment schedules so that new debt wouldn’t accumulate. Otherwise, if you’re prone to forget the dates, set the autopayment setting. 

What if you don’t get approved for your loan? 

Success is not always what applications for loans end with. But don’t despair! There is always a good Plan B, if you take a close look around. 

Get a cosigner 

A reliable cosigner is a surefire way to increase the level of your trust in the chosen company. What this person does is pay the loan off (with all the fees) in case you fail to. So, if it is possible to find a friend or family member with excellent or good credit scores, ask them to help you get approved. 

The difficult thing is that a cosigner will need to provide the same documents as you for both of you to apply. However, by going this way, you owe this person to repay it definitely. 

Choose a secured personal loan

Many personal loans are unsecured and don’t ever require collateral such as property or cars. Unlike these, secured loans might be a way out for those who want to reduce the risks for the lender and top up the chances of getting approved. 

In case a secured loan isn’t paid off, the company has the right to seize the car/house / whatever was collateral. Yet, the point is that the lender then is more willing to give out credit as the trust level grows with the appearance of the collateral on the scene. 

Conclusion

This article proves that when someone plans to take out a sum of money from a lender company it is always worth it to delve into the details. Knowing which documents to gather, what to do in order to maintain credit score high, and what alternative ways to consider when you are denied in obtaining a loan, – all of that should be carefully thought about. 

So, to crown it all, a personal loan isn’t always easy to obtain. It needs you to look and actually be) trustworthy in the sense that your financial state is more or less stable. Documents which prove it are:

  • proof of income
  • employer verification

Here also belong other papers that show that you pay taxes and your bank accounts don’t have big debts that you ignore. Each applicant will also need to undergo the proof of identity which includes the check of some personal information such as a home address and ID, as well as formulate your application for the loan correctly. 

In addition, qualifying for a loan doesn’t mean that this is one-time job. One should constantly work at improving their payment history and credit score to get rid of debts or at least be repaying them at a lower interest rate. This debt consolidation thing has helped many to receive the much needed money and improve their reputation in the lenders’ eyes.

 

FAQ

What can be used as collateral for a personal loan?

Anything with monetary value can work as a collateral. For example, this can be a car, house or apartment, boat, cash and investment account, CD, bonds, stocks, insurance policy, expensive jewelry, pieces of fine art (such as physical canvases or digital art), antiquities, precious metals, and even paychecks that haven’t been received yet.

How long does it take to get a personal loan?

There is no unanimous answer about the terms since the speed differs from lender to lender. Typically it takes from 1 business day to a week. In the first 3 days, you will get an approval. Next, the money will arrive in the mentioned account within a week if the other wasn’t stated.

Can I get a personal loan without income proof?

In rare cases, they can be received without the proof of income and similar documents. This is true about clients who have a perfect payment history and credit score. However, not all providers are so democratic. Normally, a proof of income increases the odds against getting approved for a personal loan.

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