Credible takeaways
- Lenders assess your credit score, income, debt-to-income ratio, and other factors when deciding whether to approve you for a loan.
- You generally need to provide proof of income, proof of address, and your Social Security number when you apply.
- Even if you have bad credit, you may still be able to qualify for a personal loan with some lenders.
Personal loan requirements vary by lender. However, most evaluate your credit score, income, and debt-to-income ratio (DTI) to decide whether you’ll be approved for a personal loan, for what amount, and at what annual percentage rate (APR). While personal loans tend to have lower rates on average than credit cards, you may receive a higher APR if you have bad credit.
Credit score and history
Your credit score and history are influential factors in determining both loan qualification and the APR you'll get. Generally speaking, the higher your credit score, the lower your APR. The reverse is true as well. The APR represents how much a loan costs, so lower is better.
To get a sense of how APR can impact loan costs, check out the table below. It shows average APRs by credit score based on Credible personal loan data. Data is for applicants that prequalified for a three-year personal loan.
Lenders use your score to assess how likely it is that you will repay your debt. Many have minimum credit score requirements that they use as a benchmark. For example, Axos Bank requires a minimum credit score of 700 if you apply on its website, while Avant’s minimum is 550.
A fair or poor credit score (a FICO score below 670) signifies to lenders you’ve had a difficult time with borrowing, and can make it harder to qualify. Your interest rate will likely be higher, meaning you’d pay more in interest over the life of the loan.
If your score is in the good-to-excellent credit range (above 670), lenders are more likely to consider you favorably and offer lower interest rates and better terms.
Credit history
Along with your score, your credit history is used by lenders to gauge your reliability when it comes to making on-time payments. This gives them an idea of the type of borrower you will be if they lend to you.
Payment history is a critical component of calculating your FICO credit score, making up 35%. Additionally, how long you’ve had credit and how long since you’ve used it is also taken into account.
A longer credit history is generally a good sign for lenders as it can indicate a well-developed habit of paying off debt. Length of credit history makes up 15% of your FICO score.
Good to know
You can often prequalify for a personal loan without any impact to your credit. But the final rate you get may be different than the estimate. Once you formally apply, your score may drop temporarily by up to five points.
Income and employment
When you take out a personal loan, lenders expect you to repay what you owe with income from employment or other sources. Just like your credit score, the higher your income, the better interest rates you may be eligible to receive and the more money you may be eligible to borrow.
Requirements for minimum income vary by lender. Upstart, for example, requires borrowers to have a verifiable regular source of income of $12,000 or more annually.
Other lenders, like SoFi, only require you to have “sufficient” income or an offer of employment within 90 days (with sufficient income). Unfortunately, not all lenders freely disclose their minimums, so you may have to contact a representative. Even then, they may prompt you to apply instead.
Lenders also accept income from other sources, like Social Security payments, spousal support, or alimony. To verify your income, lenders will typically request documentation such as pay stubs, recent bank statements, or W-2s.
Related: Personal Loans To Consider When You're Self-Employed
Debt-to-income ratio
Your debt-to-income ratio (DTI) is how much of your monthly income goes toward paying off debt. Lenders use this metric to determine if you are able to afford an additional payment each month.
Most lenders prefer a maximum DTI of 35% or less. Anything more can signal that too much of your income is going toward debt payments, which can be unsustainable in the long term.
To calculate your DTI, first add up your minimum monthly payments. Then, divide that by your gross monthly income, which is how much you make before taxes and deductions have been taken out.
Let’s do a real-world example so you can see the calculation in action.
Say you have an income of $5,500. Let’s add up the monthly payments:
- Rent: $1,200
- Auto loan: $450
- Student loans: $150
- Personal loan: $300
- Credit cards (minimum payment): $160
Together this comes out to $2,260. Now, divide that by $5,500, then multiply the result by 100 to get a percentage.
In this example, your DTI is 41%.
While your hypothetical DTI is over what most lenders prefer, it doesn’t necessarily mean you’d be disqualified. There may be some lenders who will work with a DTI slightly over the maximum, as each lender has different limits.
Collateral requirements
Personal loans are typically unsecured, which means you don't need to provide collateral to get one. But if your credit is preventing you from qualifying for a good APR (or qualifying at all), you might consider a secured personal loan.
Secured personal loans require collateral, like your car or a savings account, to secure the loan. A secured loan can net you a good rate if your credit is bad, but your collateral could be seized if you default.
Compare: Secured vs. Unsecured Personal Loans
General requirements
In addition to credit and income requirements, you’ll generally need the following:
- U.S. citizenship (this can vary by lender)
- Proof of address (such as your lease or utility bills)
- To be at least 18 years old
- Social Security number or taxpayer identification number (TIN)
- Proof of income (such as W-2s or pay stubs)
Depending on the lender, it may also have additional requirements not stated here.
Related: Personal Loans for Non-U.S. Citizens
Compare personal loan rates
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
How to take out a personal loan
Here are the steps to apply for a personal loan:
- Check your credit report: You can check your credit report for any inaccuracies or errors and report them to the credit bureaus. In most cases, fixing mistakes can boost your credit score. Visit AnnualCreditReport.com for a free credit report.
- Compare lenders: When researching lenders, compare the APR, loan amounts, terms, time to fund, and company reputation to find the best option for you.
- Prequalify: By prequalifying, you can get an estimate with multiple lenders, but the final rate may be different once you apply. Prequalifying also won’t impact your credit score.
- Submit your application: Once you’ve chosen the best loan for you, fill out your information in an application. Some lenders may ask for additional documentation, such as income and employment verification. After you formally apply, the lender will perform a hard credit check, which will impact your credit temporarily.
- Receive your funds: If you’re approved, review the loan agreement, and sign if it’s what you expect. You’ll receive your funds based on the lender’s time frame for delivery, but many send money the next business day after you’re approved, and some can provide same-day funding.
Learn More: How To Get a Personal Loan
How to get a personal loan with bad credit
Here are some ways to get a personal loan with bad credit:
- Research lenders: Research different lenders to see which ones cater to those with bad credit. Checking minimum credit score requirements is a good way to start. Just note that even if you qualify for a loan, you may still receive a relatively high APR.
- Get a cosigner: Some lenders will allow you to get a loan with a cosigner. A cosigner is someone with good credit who is responsible for payments if you don’t make them. They take some risk off the lender if you’re unable to pay. But know that if you make late payments, you could hurt their credit as well as your own.
- Secured loans: Unlike unsecured loans, secured loans require collateral, like your house or car. However, this puts your collateral at risk if you default. Secured loans are often less risky for the lender, which can mean a lower APR, but are more risky for you.
- Loans with a co-borrower: Similar to a cosigner, a co-borrower is also equally responsible for making payments. However, co-borrowers have access to loan funds, while cosigners don’t.
Explore: Types of Bad Credit Loans
FAQ
Can I get a loan without a job?
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How can I improve my chances of approval for a loan?
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Can a pre-approved personal loan be denied?
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Read More:
- Best Personal Loans for Fair Credit
- Best Personal Loans for Good Credit
- Best Personal Loans for Excellent Credit
- Best Hardship Loans for Bad Credit
- Best Banks for Personal Loans
- Best Credit Unions for Personal Loans
