Am I Eligible for a Personal Loan?

It might be true that money can’t buy happiness, but the right amount of money applied to a judiciously selected purpose packs the potential to render a certain amount of joy.

That’s where a personal loan comes in. Qualifying might look daunting, but it’s actually straightforward and not especially complicated.

In fact, says Ethan Aiem, CEO at Hollywood, Fla.-based Klendify, getting approved isn’t especially difficult. “But finding the right loan … is where most people stumble,” he said.

“Lenders aren’t just approving people; they’re approving fit. They’re really asking: Does this loan make sense for your actual finances? If the answer is clear, the deal gets done.”

Personal loans bear a striking resemblance to mortgages and car loans. All involve a specific amount of money, a monthly repayment plan, a completion date and thorough scrutiny of the applicant’s creditworthiness.

The differences, however, are significant.

Can you qualify for (as Aiem stresses) the right personal loan? Let’s wade in.

Common Personal Loan Requirements

Before a lender approves a personal loan, the lender must become intimately familiar with the applicant’s financial life.

“As for what matters most in getting approved, it really comes down to one thing: your demonstrated ability to pay back what you owe,” says Russell Moran, a financial analyst and owner at Russell Moran Enterprises.

To make the show-and-tell process slide along smoothly, get yourself familiar with the key personal loan terms.

1. Good Credit Score

The applicant’s credit score is at the top of the lender’s checklist. It’s not make-or-break, necessarily, but the process will flow much more agreeably if the applicant has a good credit score.

An applicant with a FICO score of 700 or above is considered good (perfection is 850), putting the loan originator in a lending mood, with some slight caveats. Applicants whose FICO scores are below 740 can expect respectable, but not the very best, loan terms.

Applicants dragged down by credit scores below 639 risk getting rejected. If they are approved, their interest rates will not be nearly as favorable as those with good-to-excellent scores.

2. Consistent Income

Lenders put great store in income that is steady and predictable, most often as a result of the applicant’s employment.

Borrowers relying on income from a job most likely will have to provide their employment status (full-time, part-time, contract) and their employer’s contact info. Lenders also may request evidence of income such as recent pay stubs, a current W2 form, tax returns, or bank statements.

Those relying on pay that fluctuates (gig work, tips, commissions) might have to provide additional documentation, including up to two years of consistent income history.

Because lenders want to be sure they’re taking a sound risk, a borrower’s spotty employment record — aimless job-hopping or periods of unexplained joblessness — can get an application red-flagged. This does not mean you can’t qualify if you’ve just started a new job, or are about to, if your employment history is otherwise solid.

Other forms of income also qualify as consistent/stable, such as child support payments, alimony, payments from the government (Social Security and/or disability) and regularly scheduled deposits from retirement and investment accounts.

3. Healthy Repayment History

Comprising the largest portion of your FICO score — 35% — your repayment history reflects significantly on your creditworthiness: Nothing looks better than a lengthy string of payments that are on time and in full.

In this, definitions matter. A payment your MasterCard issuer considers late — any moment past the due date — is not the same as a late, or missed, payment in the eyes of the Big Three credit bureaus (Equifax, Experian, TransUnion). The issuer might ding you with a late payment fee for paying a day or so late, but it’s not interesting to the Big Three until your payment goes 30 days past due.

In short, there’s breathing room, but brace yourself: Crossing the 30-days line even once, reports Experian, “can cause a major drop in your credit score.” And the stain sticks to your credit report for seven years.

4. Low DTI

DTI is shorthand for debt-to-income ratio, a fundamental personal finance metric expressed as a percentage. Lower DTIs make for happier loan underwriters.

To calculate your DTI, add your monthly debt payments  — mortgage, personal and/or vehicle loan, credit cards, and other personal debts, then divide by your gross income. Imagine your mortgage payment is $1,800, you have a $500 car payment, and your credit card minimums total $300. Added together, that’s $2,600.

If your gross (pre-deductions) monthly income is $6,000, your DTI is 43% ($2,600 divided by $6,000).

Lenders like to see a DTI below 36%. In our example above, the lender would have to see lots of other good news (stable income, steady employment) before it would approve a personal loan.

Cash flow is king, Aiem says. Consider two recent borrowers he assisted. One had a higher credit score, but unpredictable income and spending habits. The other had average credit but showed stable employment and minimal debt.

“The second one got better terms and faster approval,” Aiem says. “Lenders want predictable repayment, not flashy numbers. Your credit score lets you in. Stability and debt load decide if you stay.”

Before applying, then, “Pay down as much debt as you can, even if it takes a few months,” Moran says. “Lenders want to see the trend moving in the right direction, and even small reductions can shift the math enough to get approved.”

If possible, pay off credit cards with low balances, recommends Brennan Kolar, founder at Atlas CPA Index. “Reducing the number of accounts with balances helps your score,” Kolar says.

To begin, review your credit report for the latest on the status of your accounts; while you’re at it, look for errors or potential areas of dispute.

5. Other Requirements

In addition to the above, age limits apply: Borrowers must be at least 18 years old to qualify for a personal loan. Beyond the minimum age requirement, most lenders also weigh the applicant’s work experience and current job. Those seeking a personal loan before they turn 21 should be prepared to provide a job history.

In some circumstances, the lender may seek collateral to guarantee the loan. A secured personal loan may be secured by something of value in your possession, such as jewelry or gold, bonds or treasury notes, stocks, or collectibles.

Even if you’re not putting up collateral, the lender might want information about your financial well-being, such as checking and savings account balances, investments, and home and/or vehicles ownership.

Additionally, have a firm idea of how much money you want to borrow, its purpose, and why that figure is right for what you intend to accomplish.

Documentation Required for a Personal Loan Application

The application process requires an abundance of documentation. Here’s most of what you’ll need to provide:

• Personal information: Name, contact information, Social Security number.
• Proof of identity: The lender will take a copy of your driver’s license, Social Security card, military or state-issued ID or passport.
• Proof of address: If your proof of identity doesn’t suffice, you can submit a utility bill, a lease agreement, or a mortgage statement.
• Income: Proof of your monthly pretax income from all sources you’re using to support your financial case for the loan; the lender may ask for recent pay stubs, a W2, or tax returns to verify your income.
• Nonbusiness income: If you’re relying on other forms of income — alimony, child support — you also have to document that. Other verifiable includes statements from the Social Security Administration, pensions, and the financial institutions holding the applicant’s investments.
• Housing expenses: Monthly housing costs, such as your mortgage or rent payment.
• Consent to verify income: Authorization for the lender to verify with your employer the income and employment information you provided.

How to Increase Your Chances of Loan Approval

Borrowers blessed with the luxury of time have several ways of improving their odds of approval. Among the options are these:

• Improve your DTI by paying down debt and/or increasing your income. Scrutinize your budget for opportunities to cut expenses, freeing up cash to attack your debt. Use your free time and skills to pick up a side job, perform gig work, or freelance.
• Boost your FICO score. Study your credit reports. Make certain none of your credit accounts are in arrears, and that you’re making at least the required minimum payments on time. Next, review your report for errors or inaccuracies. If any turn up, file a dispute with the credit agencies.
• Resist the urge to apply with several lenders at once. The resulting “hard inquiries” of your credit report could chip a few points off your credit score. Lenders also could get the impression you’re shopping for more than one loan at the risk of becoming overextended.
• Check your rate for a personal loan online with several different lenders. Checking your rate without submitting an application — getting “prequalified” — will not affect your credit score, but it will provide clues about which lenders are willing to extend more competitive rates and terms.
• Do your homework. Getting the best loan for your circumstances requires research, so learn the differences among lenders. Beyond checking with your bank or credit union, investigate online lenders that might offer more competitive terms, including interest rates, APRs, and fees. Compare your options.
• Do not ask for more than you really, really need. Lenders stay in business by making loans their clients can comfortably afford, so asking for more than your income can easily repay will make getting funded difficult. After all, if this is your first personal loan, it doesn’t have to be your last. By successfully paying down your balance, you improve your status for future loans.
• Consider enlisting a co-borrower or cosigner, especially if you’re pressed for time and your application risks rejection over financial wounds you cannot quickly mend. With a co-borrower, both signees are responsible for the balance and have access to the funds, which is splendid when both parties will benefit from the loan (home improvements, for example). A cosigner, by contrast, acts as a loan guarantor, lending his/her financial status as a backstop against the loan going bad.

“People miss this all the time,” Aiem says. “Getting approved and getting a smart approval are two totally different things. Sometimes, your best move? Just wait until the timing is actually in your favor.”

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What to Do if You’re Denied

Each lender sets its eligibility criteria for personal loan approvals. That’s why it’s useful to check rates and compare options with a variety of lenders before you apply. But if your preferred option doesn’t work out, it’s not over.

You’ll recall the scene in “It’s a Wonderful Life” when Mr. Potter complains about the Bailey Building & Loan giving a mortgage to Bedford Falls taxi driver Ernie Bishop. “I happen to know the bank turned down this loan,” Potter says.

That’s how it works in real life, too. Different lenders, different scales. So, you still have options. You can try applying with other lenders. Or you can pause, work on your credit score, DTI, and income. Or you can attempt to team up with a co-borrower or a cosigner.

Denial doesn’t mean you need a “full financial makeover,” Aiem said, adding, “Panic will cost you. … Pinpoint the actual issue and fix it before you try again.” Sometimes a few financial tweaks are all that is required.

Keep in mind, even if you’re approved by your first choice, you may encounter adverse loan terms if you don’t meet the lender’s ideal requirements. You don’t have to commit to the loan if you don’t like the deal; consider applying elsewhere.

Moreover, for borrowed funds that allow flexibility, personal loans are not the only game in town.

Eager to consolidate high-interest debt at a lower rate? Check out credit cards with zero-interest introductory periods for balance transfers.

Other alternatives include secured personal loans, home equity loans, and home equity lines of credit (HELOC). Another way to claim some of the equity in your dwelling is through a cash-out mortgage refinance.

Peer-to-peer loans are often a better option for borrowers sporting less-than-ideal credit. P2P loans are funded by individual investors who can be agreeable about lending to subprime borrowers, sometimes even offering lower interest rates. Beware the origination fees, however, which can range from 1%-8%.

Explore a personal line of credit, which allows you to borrow money as you need it (up to your limit), without taking a lump sum. A personal LOC is handy for home improvements — you pay as you go — or workers whose income is irregular and may need a stopgap between paydays. Another upside: As you pay back what you’ve borrowed, you create space for additional borrowing.

If you have a permanent, or whole-life, insurance policy, you may be able to withdraw some of the cash that has accumulated. Repayment terms usually are reasonable; whatever you fail to pay back is deducted from your death benefit.

Most employer-sponsored retirement plans, such as a 401(k), offer loan programs. One obvious benefit: You’ll be paying interest to yourself, not a lender. Another: You can arrange for payments to be automatically deducted. Finally, because there usually isn’t a minimum credit requirement, you won’t be denied for a low credit score.

The Bottom Line

Having a firm grip on the factors influencing personal loan eligibility will help improve the likelihood you’ll win approval. Remember, lenders review you credit score, payment history, debt-to-income ratio, income, job status, and other factors to determine your loan-worthiness. Being prepared will help you present a winning application and speedy loan approval. Shopping loans and checking your rate with different lenders also can lead to a better rate, more favorable terms, and the loan amount you seek.