The offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money and our Advertiser Disclosure.

How to get approved for a personal loan: Everything you need to know about requirements

Yahoo Personal Finance· Nuthawut Somsuk via Getty Images
10 min read

Getting a loan to shore up your personal finance situation can be a lifesaver. Whether it’s helping front the expense of a major home improvement or floating the cost of a lavish wedding, a personal loan provides a lump sum, often between $1,000 and $50,000, in exchange for monthly payments at lower interest rates than most credit cards or other types of financing.

Worried you might not be eligible for a personal loan? Here’s the inside scoop on the different types of personal loans, what many lenders will require before approving a personal loan, and how to maximize your chances of approval.

Personal loans can be used for many different situations like debt consolidation, building credit, or financing a major purchase, but they essentially boil down to two main types: unsecured and secured.

Most personal loans fall under the umbrella of unsecured loans because the lender does not require collateral. However, if you have some rough patches in your credit history or a low monthly income, you may not be eligible for these types of loans.

If you don’t qualify for an unsecured loan, you may be eligible for a secured loan, which requires putting valuable assets up as part of the loan agreement. Homes, cars, or even collectibles and other investments are used to secure the loan, but can be seized by the lender if you fall behind on loan payments. A good example of a secured personal loan is a home equity loan.

While it’s not strictly necessary, it’s a good idea to prequalify for loan approval with a few different banks or credit unions. Although the interest rate isn’t guaranteed, prequalification allows you to see the lender’s personal loan rates and your estimated monthly payment.

It’s worth mentioning that the prequalification process involves a soft credit check, which won’t impact your credit score. Once you submit a full application, the lender will initiate a hard credit check, which will show up on your credit reports and could affect your credit score.

Securing a personal loan largely depends on your financial situation and how much interest you’re willing to pay. If you have excellent credit and a steady income, you’ll have lots of loan options. However, if you have bad credit or a history of missed payments, you may find it difficult to secure personal loans at competitive rates.

For instance, if you're trying to get approved for a $5,000 personal loan to consolidate credit card debt, a good credit score might earn you a 6.5% interest rate, while a low credit score could mean you’re offered the same loan at a 15.9% interest rate.

Wondering if you qualify for a personal loan? Here are a few common things most lenders will ask for before entering into a new loan agreement.

Once you’ve decided on a personal loan lender, you’ll complete a loan application to start the lending process. The application varies among lenders, but you should expect to provide basic personal information, loan purpose, and the loan amount. Most lenders offer online applications, but some may require filling out paperwork in person.

Lenders require a few documents to confirm your age and identity, including at least two forms of government-issued identification. Acceptable forms of identification may be a driver’s license, passport, military ID, Social Security card, or birth certificate – but check with the lender for details.

Most lenders will also want proof of address, which could be a utility bill in your name, a copy of your lease or mortgage, a voter registration card, or other official document like a homeowners or auto insurance policy that lists your address.

When it comes to income requirements, lenders have specific criteria. They want to ensure you have the kind of steady income that assures you can make your monthly payment. That means providing pay stubs, bank statements, and other documentation for employment and income verification.

Just because you have enough money coming in doesn’t mean you have the cash on hand to make personal loan payments. Lenders use debt-to-income ratio (DTI) to measure your ability to make a loan payment.

DTI ratios are expressed as a percentage and reflect what portion of your gross monthly income goes toward existing debt like mortgages, auto loans, or credit card balances. The benchmark DTI ratio to qualify for a personal loan is 35% or lower.

You don’t need a perfect credit score to get a personal loan. Most personal loan lenders prefer a minimum credit score of 650 or higher with a clean credit report and a positive payment history. You might still qualify for a secured personal loan with a lower credit score, but you’d be identified as a risky borrower and pay much higher interest rates.

Read more: How to get a personal loan with bad credit

Considering a personal loan? Follow these steps to check your eligibility and ensure you’ll be signing on the dotted line in no time.

If you don’t know what your credit score is, now is the time to get a peek at your credit profile. All three major credit bureaus are required to offer a free annual credit report that details your FICO score at annualcreditreport.com.

While credit scores in the neighborhood of 610-640 are the minimum to qualify for a personal loan, breaking 650 will earn you preferred terms and a significant interest rate discount.

Before you start to compare loan options, make sure your financial house is in order. Be sure you’re up to date on monthly debt payments, trim expenses to whittle down your credit utilization, and set up automatic payments or autopay so you won’t miss a bill.

Sit down and do the math on how much you need to borrow and how long you’ll need to pay it back. Then factors in the interest rate and origination fees, which are one-time charges some lenders apply upfront as part of processing your personal loan.

Not handy with numbers? Just enter in your loan amount, interest rate, and term into a loan calculator. Personal loans can have a repayment term of up to seven years or as short as six months.

Your current financial institution is probably the best place to start shopping for a personal loan. As a customer, they already know you and your financial history and may be more likely to offer favorable loan terms.

Prequalification is a great first step when shopping around for personal loan offers. By providing just a little basic information, lenders give you a rough estimate of your interest rate, terms, and an estimated monthly loan payment.

While your own bank or credit union might offer a great rate, shop around with a few other lenders before you submit a loan application. Make sure the lenders you query are only issuing a soft check to avoid negative impacts on your credit.

Once you’ve found a lender that’s the best financial fit for you, gather your documentation, including identification, address and proof of income. If you don’t have traditional paystubs, you can offer income tax returns as proof of income instead.

Last but not least, complete the loan application process. Make sure to ask questions before you sign on the dotted line, such as whether there are prepayment penalties for paying off the loan early and if the lender charges an origination fee.

You can absolutely use online lenders to secure a personal loan. Many borrowers prefer to work with online lenders because personal loans are issued quickly and deposited directly into bank accounts.

But keep in mind that some of these lenders specialize in same-business day loan decisions or working with borrowers who have bad credit, so they may charge more fees and have higher interest rates because they often work with bad credit loans.

personal loans

Getting denied a personal loan is frustrating, especially if you’re seeking an emergency loan. However, there are several things you can do to improve your chances of getting approved in the future.

Finding out why you were denied is critical to deciding what to do next. According to Credit.org, an independent nonprofit financial counseling agency, the most common reasons for personal loan denials include the following:

  • Sparse or short credit history

  • High DTI ratio

  • Low credit score

  • Low or irregular income

  • Missing or incorrect application info

Zero in on the factor the lender thinks was the most problematic, such as your creditworthiness, and focus your efforts there for the next few weeks or months.

Review your credit report carefully, scanning for mistakes you can report or ways to improve your score. For example, if you recently paid off and closed out multiple credit cards, that might have actually hurt your credit score in the short term.

Read more: How to improve your credit score and mistakes to avoid

There are two ways to improve your debt-to-income ratio. You can either bring in more income through a pay raise or side gig, or work to pay off debt more aggressively. You could also work the problem from both ends by doing a little of both.

If you were denied a larger loan amount, you can try asking for less and see if you’ll be approved for a lower loan amount at the same terms. There’s also nothing that says you can’t have multiple personal loans, although watch out for how that impacts your credit score.

Read more: How many personal loans can you have at once?

Offering up collateral for a secured personal loan is one way to get approval from a lender. This means the financial institution will face less risk of default since your assets have a value that can be seized. Here are some common assets that can be offered as collateral:

  • Cash, savings or CD accounts

  • Car or other vehicle

  • Home or other real estate

  • Stocks and bonds

  • Insurance policies

  • Jewelry and art

  • Antiques or collectibles

Check with the lender for specific criteria on what they consider acceptable collateral to secure a personal loan.

And last but not least, if you don’t have the credit history to secure a personal loan, consider asking a trusted family member or friend to co-sign. The co-signer is added to the loan agreement and shares financial responsibility if you fail to make a payment or default on the loan.