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There is a solution if you are tired of living from paycheck to paycheck. Personal loans can provide you with the funds you need for various reasons. Whether it’s an emergency or an opportunity that has come up, a personal loan will allow you to take care of business and then pay back your creditors at your own convenience.
This blog post will discuss what requirements are needed for approval for a personal loan and what documents must be submitted when applying for one.
What Are the Requirements to Get a Personal Loan?
Typically, personal loans are approved regardless of your income. So long as you have enough credit history and a steady source of income (whether it be from employment or another investment), you should not face any difficulties obtaining one.
However, you will need to verify this information when applying for a personal loan, but having these factors alone typically ensures that you will be approved.
Some lenders may have a few other requirements, such as being a citizen of the United States or having a minimum credit score. But, in general, meeting the previously mentioned criteria is usually enough for loan approval.
Personal Loan Requirements
The requirements for obtaining a personal loan are typically relatively straightforward. However, there are a few factors that should be noted. The list below outlines what you should know when applying for a personal loan.
#1. Your Income
Your income must meet specific requirements to qualify and be sufficient to repay the loan over a set period.
For example, if you are earning minimum wage and have no additional income sources, your lender may not feel that you can afford repayment. In this case, the bank may deny your loan.
Or, if you are someone who has a steady income source, but it is not high enough to cover the monthly repayment amount of your proposed personal loan, then this could also cause you problems with obtaining one. Before applying for a personal loan, you must discuss these factors in detail with your lender.
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#2. Credit Score and History
A credit score is a numerical representation of your creditworthiness. This number is determined by considering various pieces of information in your credit file, including how much debt you have compared to your total available credit, as well as how often you have made late payments or been delinquent on bills in the past.
Your credit score will be one of the main factors that a lender looks at when considering your application for a personal loan.
If you have a low credit score or negative items on your credit report, then it is likely that you will not be approved for a loan. This is because the lender sees you as a higher risk, and therefore will not want to take on the financial responsibility of lending money to you.
Having an excellent credit score is typically not required for approval either, but it’s certainly more likely that you will obtain one if your credit history looks good. If your income is sufficient, this should be less of a concern when applying for a personal loan.
Another thing to note about your credit score is that lenders will typically look at your overall number and the breakdown of each component that makes up this number. For example, they may be looking at these different factors:
- Your payment history (how often are you late on payments?)
- Your credit utilization (what percentage of your available credit are you using?)
- The age of your accounts (have you had these accounts for a long time?)
- How often do you apply for new credit (does this look like someone desperate for money?)
The lender will consider all of these factors, so it’s essential to be aware of them and improve your credit score if you have any negative items.
#3. Potential Collateral
This is not always required, but some lenders will be interested in having any sort of collateral that you may have.
Collateral means an item or asset that can serve as security for the loan and ensure repayment to the lender if there were ever a problem.
For example, let’s say you are looking at purchasing a new car and want to take out a loan for this purchase. The lender may ask for the title of the new car as collateral so that if you were to default on your payments, they could then take possession of the vehicle and sell it to recover their losses.
Some lenders may be willing to waive this requirement if you have an excellent credit score or provide sufficient collateral in another way (for example, through your savings account).
The bottom line is that having some form of collateral can make it easier to obtain a personal loan. The lender may feel more hesitant about approving your application without this type of security.
#4. Debt-to-Income Ratio
Your debt-to-income ratio (or DTI for short) shows how much of your monthly income goes towards paying off all of your bills and debts, including any credit cards or other loans you may have. You can then use this number to determine if you are eligible for a personal loan.
The higher your debt-to-income ratio, the more likely it is that you will not qualify for a loan (or at least not one with competitive terms). This is because lenders typically want to see that your debts do not exceed 35-40% of your monthly income. Anything above this number usually means that you struggle to pay off all your bills and will be a significant risk for the lender.
What Documents Do You Need to Apply for a Personal Loan?
The documents required to apply for a personal loan will vary depending on the lender. These documents are used to verify your identity and show that you meet the necessary requirements.
Typical Personal Loan Documents
The list below provides a general overview of the types of documents you may be asked to provide:
#1. Personal Identification
This could be your driver’s license, passport, or state ID and is used to verify your identity.
#2. Proof of Address
You may need to prove your address by providing a copy of an original utility bill, lease agreement, recent mortgage statement.
If you cannot provide this for whatever reason, you may need to provide two forms of alternate documents.
For example, some lenders will accept a recent pay stub or bank statement with your name and address listed.
If you are self-employed, you may need to provide a recent tax return or business license.
#3. Employer and Income Verification
The lender will need to verify your employment and income. This is usually done by providing a copy of your recent pay stubs or W-9 forms.
If you are self-employed, you may need to provide other documentation such as bank statements or an accountant’s letter.
Some lenders may also require that you provide proof of your social security number.
#4. Loan Application
You may need to fill out a loan application that provides the lender with information about your credit score, current debt obligations, and employment status.
The bottom line is that many different documents are required depending on the type of personal loan you’re applying for and who is providing it. Having a complete set of these documents will make getting a personal loan much easier.
What Disqualifies You from Getting a Personal Loan?
Several things can disqualify you from getting a personal loan, such as having bad credit or not meeting the lender’s minimum income requirements.
Some lenders may also look at your debt-to-income ratio to determine if you are eligible for a loan. If your DTI ratio is too high, it can make getting approved for a personal loan more difficult since the lender may see you as being at risk of not repaying them back.
If your income or credit score is not up to par, you may want to consider using a cosigner on your loan application. This could be a friend or family member willing to help you get the loan and agreeing to take responsibility if you cannot repay it.
Having some form of collateral can make it easier to obtain a personal loan. Without this, you may need to have a good credit score and high income to be approved.
Personal loan requirements can differ from lender to lender, so you must research and understand what is needed before applying. By knowing the requirements, you can increase your chances of being approved for a loan and get the money you need.
Bottom Line: Personal Loan Requirements
To summarize, several requirements need to be met to get approved for a personal loan.
These include having a good credit score and history, providing proof of income, and having an acceptable debt-to-income ratio.
In addition, you will need to provide various documents to verify your identity and employment status. If you do not meet all the lender’s requirements, you may be disqualified from getting a personal loan.
Having all the necessary documents ready will help make the process smoother and increase your chances of being approved for a loan.