5 personal loan requirements and how to meet them

Personal loans offer access to cash that can be used for a wide variety of purposes — if you qualify. Generally, lenders consider five factors when reviewing your loan application: your credit scores, credit history, income, debt-to-income ratio and planned loan use. But each lender sets unique eligibility requirements — for example, one lender may accept borrowers with low credit scores, while the next may only approve your application if you have good credit or better.

We’ll explore these five personal loan requirements, explain why they matter and offer tips to improve your chances of approval.

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5 common personal loan requirements

If you need to borrow money, you’ll want to be sure your application is strong enough to qualify for financing and receive the best personal loan rate. While each lender sets its own eligibility criteria, here are five common requirements lenders review to determine your eligibility:

1. Credit scores

Common requirement: 600 or better

Since most personal loans are unsecured (meaning not backed by collateral), your credit scores are crucial in determining your eligibility. Your scores are a measure of how well you’ve managed credit in the past — the higher your scores, the more creditworthy you are in the eyes of lenders.

“To get your foot in the door, aim for scores around 600 when looking for a personal loan,” said Joseph Camberato, CEO of small business lender National Business Capital. “Sure, some lenders might entertain lower scores, but be ready for higher interest rates and more restrictions with those deals.”

Although some lenders specialize in bad credit loans, many require good credit scores (670 to 739, according to FICO) or better to qualify for financing. The interest rate you’ll pay is also determined by your scores.

Here’s a look at the average personal loan rates by credit score.

Related >> What factors affect your credit scores?

Next steps: Check your credit scores to determine where you stand. Your bank or credit card issuer may offer free access to your scores, or you can pay for a third-party service, like myFICO. If your scores are too low to qualify you for an affordable rate, focus on paying down debt and making all payments on time to improve your credit scores.

2. Credit history

Common requirement: No major negative events, like bankruptcies

Your credit reports contain information about your open credit accounts, payment history and credit challenges, like bankruptcy or foreclosure. Lenders are looking for a long history of on-time debt payments and low levels of outstanding debt.

Your financial habits and credit history help lenders predict how likely you are to repay your personal loan. If a lender reviews your credit reports and sees multiple missed payments or a loan default, they may determine that you’re too risky as a borrower.

Next steps: Review your credit reports and ensure they’re up-to-date and accurate — visit AnnualCreditReport.com to get free weekly copies of your reports from all three bureaus (Equifax, Experian and TransUnion). If you find any mistakes, contact the reporting bureau to dispute the error.

3. Income

Common requirement: $25,000 or more

Lenders want to know that you can afford your monthly loan payments, so they’ll review your annual income. Demonstrating adequate employment income is the easiest way to qualify, but most lenders also consider other income sources, including alimony or Social Security benefits.

Minimum income requirements vary widely by lender. For example, Discover requires a minimum annual household income of $25,000, while LendingPoint requires at least $35,000. Most lenders don’t publicly disclose their income requirement but still consider it during the application process.

Next steps: If your income is too low or inconsistent to qualify for a personal loan, consider applying with a cosigner or co-borrower with a steady income. You may also pick up a side hustle or ask for a raise at work to boost your income.

4. Debt-to-income ratio

Common requirement: 36% or lower

Your debt-to-income (DTI) ratio is the percentage of your monthly gross income that’s consumed by debt payments. To calculate your DTI, divide your monthly recurring debt payments by your pre-tax income.

Example: If you earn $7,000 each month before taxes and have monthly debt obligations totaling $2,450, your DTI would be 35% ($2,450 / $7,000 = 0.35).

Most personal loan lenders calculate your DTI to ensure a new loan won’t stretch your budget too far. Many lenders look for a DTI of 36% or less, including the new loan payment, though some may accept DTIs as high as 43% or 50%.

“Different lenders, different strokes, but keeping your debt-to-income ratio at 36% or below is a smart move,” said Camberato. “This tells lenders that your income can comfortably handle loan repayments without putting you on the edge of default.”

Next steps: Start by calculating your DTI to understand your eligibility. If your DTI is too high, focus on paying off debt before applying for a loan. To impact your DTI quickly, pay off small loan balances completely — by zeroing a balance, it will no longer count against your DTI.

5. Permitted loan use

Common requirement: College or small business expenses are commonly not permitted

Personal loans are a highly flexible form of borrowing — in many cases, you can use loan funds for any (legal) purpose, including debt consolidation, home improvement or a major purchase. However, most lenders stipulate that you can’t use loan funds for college tuition or small business expenses, and you typically can’t use a personal loan to gamble or purchase real estate.

Some lenders specialize in certain loan uses. For example, Happy Money and Reach Financial only offer personal loans for credit card consolidation.

Next steps: Consider how you intend to use the loan funds and find a lender that aligns with your goals.

Optional personal loan requirement: collateral

Most personal loans are unsecured, which means they don’t require collateral. Instead, your eligibility is determined by your creditworthiness. But some lenders offer secured personal loans and allow you to pledge collateral to secure the loan and potentially receive a lower rate. For example, they might accept a vehicle you own outright, a savings account or a CD account.

It can make sense to pledge collateral if you’re having trouble getting approved for an unsecured personal loan. Collateral reduces the lender’s risk since they can seize your asset if you default. As a result, the lender may be willing to accept lower credit scores or offer lower rates. Just remember that you’ll lose your pledged asset if you fail to repay the loan.

While this form of borrowing isn’t as common as an unsecured loan, but you can typically find the best secured personal loans at credit unions or smaller community banks.

OK, but what else do I need for a personal loan?

Applying for a personal loan often starts with requesting a quote online. To determine whether you pre-qualify, most lenders will ask a few quick questions and run a soft credit check, which won’t impact your credit scores.

Once you get pre-qualified with a few lenders and have chosen the best offer, you’ll complete a more comprehensive loan application, agree to a hard credit inquiry (which can temporarily drop your scores by about five points, according to FICO) and provide documentation to verify your personal and financial information. While the list of required documents can vary by lender, most request the following:

• Loan application: Here, you’ll share your reason for borrowing, personal identifying and contact information, education and employment history, income information and residency details. You may also have to detail your current debts.
• Proof of identity: You must provide a valid government-issued form of identification, such as a Social Security card, driver's license, passport or military ID. Some lenders may require two forms of identification to combat identity theft.
• Proof of address: This may include a recent utility bill, voter registration card, rental agreement or mortgage statement with your name and address listed on it.
• Proof of employment and income: You might provide recent pay stubs, bank statements or tax returns. You’ll also need to supply your employer’s contact information. If you’re self-employed, the lender may request your 1099 form — though some lenders won’t consider self-employed borrowers unless you have a co-applicant.
• Proof of additional income: If your employment income is insufficient, you may need to provide documentation of supplemental income, including retirement savings, alimony or child support payments.

8 tips to help you qualify for a personal loan

1. Improve your credit scores. Make all credit account payments on time, pay down credit card balances, keep credit card accounts open long-term, limit hard inquiries, dispute any errors on your credit reports and get credit for on-time utility, rent and cell payments with free Experian Boost.
2. Pay down other debt. This step will improve your DTI ratio, strengthening your loan application. Paying down debt will have the added benefit of increasing your credit scores by improving your credit utilization ratio.
3. Demonstrate steady income. Build longevity with your current employer or business and maintain a steady (or growing) monthly income.
4. Consider a co-applicant. Adding a creditworthy cosigner or co-borrower can help you get approved, as they’ll be liable to pay off the loan if you can’t. Keep in mind that asking a loved one to join your personal loan application is no small request — if you default on the loan, their credit scores will be impacted.
5. Get pre-qualified with multiple lenders. Personal loan lenders have unique eligibility requirements and loan offerings. By shopping around, you improve the odds of getting approved and finding the best deal.
6. Add collateral. Pledging collateral reduces the lender’s risk — if you default, they can seize and sell your collateral to cover the balance. If you’re having trouble getting approved, consider lenders that offer secured personal loans, like your local credit union or regional bank.
7. Request a smaller loan amount. Put plainly, it’s easier to qualify for a smaller loan. Borrowing as little as possible also helps keep interest costs down. The best small personal loans start as low as $250.
8. Consider your current financial institution. While you should always shop around for the best lender, your current bank or credit union might be more willing to overlook past credit difficulties or offer a relationship rate discount.

My personal loan application was denied. Now what?

Don’t fret — a single rejection doesn’t mean you won’t be able to get a personal loan. Start by understanding why your application was denied.

The Equal Credit Opportunity Act (ECOA) requires lenders to send you an adverse action notice explaining the reason(s) for your loan denial. Review this notice to identify the areas you need to improve your financial health, which may include improving your credit scores or paying down other debt.

You can also continue applying with other institutions, as each lender has its own eligibility standards, and some lenders are more lenient than others.

If you can’t qualify for a personal loan but need to borrow money, consider some of the following borrowing alternatives:

• Crowdfunding
• Cash advance apps, like Dave and Earnin
• Borrowing from a friend or family member — just be sure to agree on repayment terms
• Buy now, pay later loans
• Payday alternative loans (PALs) from federal credit unions
• Home equity loans or HELOCs, if you’re a homeowner with sufficient equity