How to get approved for a personal loan

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.

Unsecured vs. secured personal loans

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.

Unsecured personal loans

Most personal loans fall under the umbrella of 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.

Secured personal loans

If you don’t qualify for an unsecured loan, you may be eligible for a , 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.

Do you need to get preapproved for a personal 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.

How hard is it to get approved for a personal loan?

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.

6 common requirements to qualify for personal loans

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.

1. Personal loan application

Once you’ve decided on a personal loan lender, you’ll 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.

2. Several forms of identification

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.

3. Proof of residence or address

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.

4. Proof of income

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.

5. Debt-to-income ratio

Just because you have enough money coming in doesn’t mean you have the cash on hand to make personal loan payments. Lenders use 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.

6. A good credit score

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.

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Step-by-step guide to getting approved for a personal loan

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

Step 1: Check your credit report

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 that details your FICO score at .

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.

Step 2: Get your personal finances in order

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.

Step 3: Decide the type of loan and loan amount you need

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 . Personal loans can have a repayment term of up to seven years or as short as six months.

Step 4: Contact your current bank or credit union

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.

Step 5: Consider prequalification

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.

Step 6: Shop around with multiple lenders

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.

Step 7: Gather your financial documentation

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.

Step 8: Complete the personal loan application process

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.

Can you get approved for a personal loan online?

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.

6 things you can do if you’re denied a personal loan

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.

1. Ask for the reason you were denied

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 for personal loan denials include the following:

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.

2. Work on your credit score

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.

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3. Improve your DTI ratio

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.

4. Apply for a smaller loan

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.

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5. Offer collateral

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.

6. Consider a co-signer

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.