Personal loans are a type of loan that borrowers can obtain from banks, credit unions, or online lenders. These loans have many uses, such as debt consolidation, car purchases, vacations, taxes, bills, and even home improvements.
Personal loans can range anywhere from $1,000 to $50,000, depending on the lenders you apply with. Typically, personal loans are offered as unsecured loans, meaning there is no collateral backing them, which usually imposes a stricter approval process because lenders will be looking at individuals’ financials.
To approve you for a personal loan, lenders will look at things such as your credit score, payment history, and income, making sure you are able to pay them back.
If you are approved, you will receive a lump sum of money, and you will make payments on it over an agreed-upon term. Here is a guide to the requirements for personal loans:
Every lender will have its own set of requirements or a combination of requirements that will help them determine whether they are able to give you a loan. When lenders evaluate borrowers’ applications, they typically look for a few common factors to approve you.
Lenders usually consider your credit score, account history, income, and any debts you have. All of these factors play a role in determining whether you are able to get approved and what APR you will receive.
Here are the typical requirements for a personal loan:
The main thing lenders look at when approving individuals for a personal loan is their credit score. The credit score helps them determine whether the borrower has been responsible and paying their bills on time.
The lower the credit score, the higher the chance that a borrower is not responsible and might not repay the loan. While high credit scores usually indicate that a borrower has been responsible in making timely payments on their accounts and usually receive more favorable terms due to the low risk they present.
There are many lenders out there that can give out loans to any kind of credit score, but lenders that specialize in lower credit scores usually offer higher interest rates, costing borrowers thousands extra.
When applying for a loan, you should always consider boosting your credit score to get more favorable terms, if your lacking a credit score or credit history consider adding a co-signer to increase your chances of approval.
Your credit history is closely tied to your credit score, with a good credit history being more likely to result in a good credit score. The credit bureaus rate credit history as one of the most valuable factors, typically accounting for around 35% of your overall FICO score.
Your payment history reflects whether you have been making payments on time for your car loans, personal loans, credit cards, bills, and other credit accounts. A good credit history indicates that you have been making payments on time as promised to your creditors, which can help boost your credit score.
On the other hand, if you miss payments or have any other negative reports to your credit, it can remain on your record for up to seven years. The same goes for good credit information, which can stay on your record for up to ten years.
This information can either help or hurt your credit journey. Lenders view your credit history as a track record of your payment responsibility and use it to decide whether to offer you better credit products.
If you are late on a payment, inform the lender, who may be able to provide you with extra time to avoid a negative impact on your credit history. Monitoring your credit accounts can also help you spot any false information and plan ahead for your bills to avoid missed payments.
Your income plays a significant role in your loan approval because it helps lenders determine if you can afford the payments. When lenders look at your income, they not only consider how much you make but also your expenses.
For example, if you earn $10,000 every month but spend $9,000 on bills, lenders will take that into consideration because a slow season at work can affect your income, making it difficult for you to afford your payment and increasing the risk for the lender.
On the other hand, if you earn $10,000 but only spend $3,000, lenders will see that as positive because you can afford your payment even if your income is slashed by 50%.
Additionally, income is considered to determine if you can afford the payments. For instance, if you earn only $3,000, but the payments on a new Lamborghini are $4,000, it will show the lender that you are applying for a loan that is too high.
The DTI ratio is the total sum of all your current debts divided by your monthly income, expressed as a percentage. For example, if you make $10,000 per month and have monthly expenses of $5,000, your debt-to-income ratio will be 50%.
Lenders consider your debt-to-income ratio as an important factor when approving your loan because it shows what percentage of your income is allocated towards your debt. If you have a low DTI percentage, that means you will have more disposable income, which can help you afford extra payments.
On average, lenders prefer a 35% DTI ratio, but each lender has their own criteria for approvals. To lower your debt-to-income ratio, you can pay down your debts or increase your income, which can help you get approved for a loan.
If you have a high DTI ratio and want to increase your chances of approval, you can either apply for a smaller loan or consider adding a co-signer.
Personal loans may be an amazing option for some individuals, but they could be a bad choice for others. When applying for a personal loan, you should ask yourself if it is the right choice for you.
There are many factors that you should consider before applying for a personal loan, such as whether you can use your savings to cover the bills, if you can borrow some money from close friends or family, or if there are any cheaper loan options available that might be able to help you save money on your loan process.
Each situation is different, but before applying for a loan, you should evaluate all your options before incurring extra debt. However, personal loans can be an amazing option if you are looking to get funds for things such as car repair, debt consolidation, house repair, major purchases, and much more.
Before applying for a personal loan, you should always compare offers from different lenders to determine which one might be a better choice for your needs. If you end up applying for a loan, make sure to create a plan on how you will repay the loan so that you do not miss any payments.
Each lender will have their own requirement of documentation they will need to approve an individual for a loan. Some lenders may require more documentation than others and you should always give them all the information to help them speed up the process. Sometimes lenders might even need to verify the information.
But usually, most lenders will require you to give them the following documents:
Personal Identification: To verify your identity, lenders will usually request that you provide some kind of identification. Usually, it will have to be a government-issued document such as a driver’s license, passport, or ID. This helps the lender verify that you are who you said you were. Some lenders may ask for more than one proof of identity.
Proof of income & Employer: Lenders will typically ask for some kind of proof of income. That could be things such as pay stubs, W-2s, or your tax returns. This will help them verify that you have a steady income source meaning you will be able to repay the loan. Also, this helps lenders verify your employer and sometimes the lender might reach out to your employer to confirm your information.
Credit score: You won’t have to provide that information to the lender, but the lender will pull up and view your current credit score to determine your creditworthiness. This will help them determine what interest rate you will be approved for and show them your past track record. The higher the credit score the more chances of approval you have and the better the interest rate you will receive.
Other Documentation: There are other things the lender may request from you such as credit application, bank statements, proof of asset, collateral information, and even some refrecens. Each lender will have their own list of documentation they will need for evaluating the borrower and helping them determine if your credit worthiness.
There is no one right way to apply for a loan, when applying for a loan you should always compare the lenders to determine which one might fit your situation the best. Before applying you should always consider if a loan will be the best option for you or if you are able to cover the expenses some other way.
Also, be sure to compare other loan options to see which ones might be cheaper for you like borrowing from a 401k or a close friend. But if you decided that a personal loan might be right for you here are steps to follow when you want to apply for a personal loan:
Check your credit score: Before applying for a loan you should always know what your current situation is. This will help you determine if you’re able to apply for a loan or if you might need to consider other options.
For example, if you have a lower credit score a personal loan might not be the right choice for you because of the higher interest rates. You should always check your credit score to see if you are creditworthy to apply for a lender and to see if there are steps you can take to boost your credit.
Which in return will help you get approved for better rates.
Choose an amount: Decide how much you want to apply for and be sure to make sure you’re able to afford the payment. You should always borrow the reason which will help you avoid high payments that could add extra stress to your life.
To determine how much you can afford you are able to use online payment calculators to see what payment you feel comfortable paying.
Compare lenders & Apply for the loan: Before applying for a loan you should compare with multiple lenders and see which one might offer you better terms. Once you have decided which lender will work best for you, then you can fill out an application and wait for the answer.
Lenders may have several reasons to reject a loan application, such as inaccurate information, insufficient credit history, high debt-to-income ratio, low credit score, low income, or short employment history.
If you receive a loan denial, it’s important to review the reason for the rejection, obtain a copy of your credit report to check for errors, work on improving your credit score, consider finding a co-signer, explore alternative loan options, or take the time to improve your financial situation before reapplying.
Lenders are legally obligated to provide a reason for the denial, which can guide you in addressing the issue before reapplying. Here are the steps you should take if a lender issues you a denial letter:
Check the reason: When you are denied a lender will issue you a letter for the reason you were denied, sometimes there could be more than one reason. After finding out the reason why you denied it, find out what it really means.
Improve the situation: After finding out the information of why you got denied, take action to improve the situation. For example, if you got denied because of high debt. Start by slowly paying off your current debt which will lower your debt and increase your credit.
Get a co-signer: If you are desperately in need of cash you are able to re-apply with the lender with a co-signer or co-buyer. Adding another person to the loan will increase the chances of your approval because co-buyers are responsible for the loan as much as the main borrower is.
When a main buyer stops paying the lender requires the co-buyer to make the payment. This usually helps the lender decrease the risk and in most cases improve your terms.
Check for other options: If you got denied by one lender doesn’t mean other lenders will say the same thing. You might have applied for a loan with a lender that has strict criteria.
Be sure to look at other loan options that might have looser criteria or maybe consider other loan options in general. Usually, personal loans have much more strict approval criteria, and applying for a loan with collateral can improve your approval chances.
Just like in any industry, there are common terms used by lenders. Understanding these terms can help you make an appropriate decision about your loan approval.
It can help you avoid hidden fees and truly understand the full story of the loan.
The most common terms used by lenders are annual percentage rate (APR), Collateral, Co-signer, Grace period, Prepayment penalties, principal, and repayment term. These are not all the terms used by lenders but the most common used in the industry:
Annual Percentage Rate (APR): The APR will be the interest that a lender charges and it included all the fees associated with the loan. This can help you determine which lender has the lowest fees.
Collateral: Collateral will be something the borrower uses to secure the loan. Usually could be anything of value such as a car, stocks, property, and such. If the borrower fails to pay off the loan, the lender is able to use the asses to recover their loss.
Co-Signer: Will be someone who is willing to guarantee the loan for you. This means that they are equally responsible for the loan. If the main buyer fails to make payments on the loan the co-signer is required to step in and make payments.
Usually, co-signers are individuals with either higher income or better credit scores increasing the borrower’s chances of approval.
Grace Period: The term between when the lender gives out a loan and the borrower doesn’t have to pay. Usually, grace periods can be 30 days or more before you need to start making payments on the loan.
During covid for the auto industry lenders offered up to 120 days of no payment. Each lender will have their own grace period helping the borrower plan ahead for the new payments.
Prepayment Penalty: This is a fee a lender will charge if you pay off the loan before the agreed-upon time. Not all lenders will have this but you should always double-check with the lender if they have a prepayment penalty. This is done by the lender to recoup some profit that they might have gotten if you had the loan for the full term.
Principle: A principle is an amount you borrowed. So if you borrowed $10,000 from the lender, your principal is $10,000. Usually, the principal is paid back to the lender plus interest.
Repayment Terms: Repayment terms will usually be the length of time you have to repay the loan. Usually, personal loans can have repayment terms anywhere from 1-7 years and each lender might have different terms they offer borrowers.
Each lender has different criteria they consider when approving borrowers for a personal loan. But to increase your chances make sure you have a higher credit score and lower your debt. You can also apply with a co-signer which ultimately will increase your chances. Be sure to check with the lender before applying to help you understand if you might get approved with them.
This will depend on the lender and your income. But typically you can borrow anywhere from $1,000-$100,000. Each lender will have their limit and your income will also play a role in the amount they are willing to give you.
Interest rates can vary depending on the lender and the borrower. But we have seen the interest as low as 3% and all the way up to 35.99%. But typically on average personal loan interest rate will be around 10.71%.
The approval time frame will depend on the lender, but usually most personal loans are approved instantly and you can get funds as fast as the next day.
When choosing a personal loan lender be sure to compare the interest rate, fees, and loan terms and be sure to check with the lender's reputation. This will help you determine if that might be the right lender for your situation.
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