Lender requirements for personal loans vary, but financial institutions look at a few things when considering applicants such as income and credit score. Before you begin looking for a loan, you should familiarize yourself with the requirements you will need and the documentation that you will need. This information can streamline your application and increase your chances of being approved.
These are the five most important requirements financial institutions consider when evaluating loan applications.
1. History and Credit Score
Lenders will consider the applicant’s credit score when considering a loan application. Credit scores of gladloan.com are calculated based on factors such as payment history, outstanding debt, and credit history. While many lenders require applicants with a minimum credit score of 600 in order to be eligible, some lenders will lend to those without credit histories.
To ensure that borrowers have sufficient income to repay new loans, lenders may impose income restrictions. Lenders have different minimum income requirements. SoFi, for example, has a minimum annual salary requirement of $45,000; Avant’s minimum annual income requirement is only $20,000. However, don’t be surprised if your lender doesn’t disclose minimum income requirements. Many don’t.
Recent tax returns, bank statements, pay slips, and signed letters from employers may be evidence of income. Self-employed applicants can also provide bank deposits or tax returns.
3. Ratio of debt-to-income
The Debt to-income ratio is expressed in a percentage. It represents the amount of a borrower’s gross monthly income that goes towards her monthly debt service. Lenders use DTI in order to predict the ability of a potential borrower to pay off current and new debt. A DTI of less than 36% is the ideal ratio, but some lenders will accept a highly qualified applicant with a ratio higher than 50%.
Your lender may require that you pledge assets or collateral if you apply for a secured personal loans. For loans for vehicles or homes, the collateral will usually be related to the underlying purpose. Secured personal loans can be secured by cash, investments accounts, and collectibles such as coins or precious metals.
Lenders can take collateral if you default on loan payments or fall behind in your payments. This will allow them to recover the loan balance.
5. Origination Fee
Although not required by lenders, many lenders require that borrowers pay personal loan origination charges to cover costs such as credit checks, processing of applications, and closing. These fees can range from 1% to 8% depending on the loan amount and credit score of the applicant. While some lenders charge origination fees in cash at closing, others finance them or subtract them from total loan amount.
The most common personal loan documents
Your lender will require a variety of documents from your identity to proof of your employment and residence when you apply for a personal loan. These are the most commonly requested documents by lenders as part of the application process for a personal loan.
Request for a Loan
Lenders require potential borrowers to fill out a loan application to start the lending process. Every lender has its own application so requirements can vary. You will need basic information about yourself, the amount you wish to borrow, and the purpose of your loan.
Lenders may have different requirements for loan applications. There are many online lenders that allow you to apply online, but others might prefer that you call them and discuss your application before making a decision. Some financial institutions and brick-and-mortar banks may require applicants to submit a paper version of their application.
Documentation proving identity
Lenders require applicants to show at least two forms government-issued identification in order to prove that they are at minimum 18 years old and a citizen of the United States. This prevents identity theft. Acceptable forms for government-issued identification include:
- Driver’s licence
- Other IDs issued by the state
- Certificate of citizenship
- Certificate of birth
- Identification for military personnel
- Verification of Income and Employer
Lenders want to know that you can pay off your existing debts and the loan. Lenders will often require potential borrowers to show proof of their earnings and employment history as part the application process. For traditional employment, income verification can be done in the following ways:
- W-2s and 1099s
- Statements from banks
- Contact information for employers
Self-employed borrowers should instead use bank statements, 1099 forms, and their income tax returns.
Documentation attesting to the address
Most lenders will want to verify your employment. They also want to see proof of your stable living conditions. You may need to provide proof of your address. This could include a copy or your rental agreement or utility bill, voter registration card, or proof that you have home, rental, or auto insurance that lists your address.
How to get a personal loan
Online applications for personal loans are often possible. A decision could be made as quickly as the next day. Before you submit an application, you need to do a few things. These steps will help you get a personal loan.
- Examine your credit score
- You can improve your score by checking for errors and paying off debt
- Determine how much money you would like to borrow
- To find competitive rates, use lender prequalification
- Send a formal loan request
What should you do if your request is denied?
Lenders can reject your personal loan application for many reasons. Your credit score or DTI may be too low. You may also be asked to borrow more money that the bank believes you can repay, based on income and stability.
There are steps you can take to increase your chances of getting a loan if a lender rejects your personal loan application.
- Ask about the reason why your application was turned down
- Check your loan application carefully for any errors or inaccuracies
- Paying off your outstanding debts can improve your credit score.
- Check your credit report for errors
- Steadily increase your income
- Compare lender requirements
- Request a lower loan amount
- Consider using a cosigner