Personal Loan Requirements To Know Before Applying (2024 Guide)

Personal loan requirements are the specific criteria you must meet to be eligible to borrow money from a bank, credit union or online lender. Each lender sets its own rules for who qualifies for a personal loan, but for most, you’ll need to meet the standard requirements listed below.

Legal Status

Generally, you’ll need to have legal status in the U.S. to qualify for a personal loan. In most cases, this means being a U.S. citizen or permanent resident and having a valid Social Security number or Individual Taxpayer Identification Number (ITIN).

Most lenders also require you to be at least 18 years old and have a bank account in your name. This allows the lender to verify your income and confirm that you have a way to make loan payments.

Sufficient Credit Score

Having a high enough credit score is another important personal loan requirement. But figuring out what “high enough” means can be a little tricky, as different lenders set different minimums. 

Generally, a FICO credit score of 670 or higher is considered good. But some online lenders, like Prosper, accept credit scores as low as 600, while lenders like Axos Bank require a credit score of 700 or higher.

There are a few ways you can improve your credit score if it’s not high enough. The best way is to make all of your bill payments on time, every time. You can also work to keep credit card balances low or get help from a reputable credit counseling agency. Additionally, if you don’t have time to improve your credit score, you may still qualify for a personal loan with a co-signer or co-borrower. 

Proof of Income

Lenders want to ensure you have the financial means to repay your loan on time, so having verifiable income is another important requirement. Your income can come from a variety of sources, such as a full-time job, self-employment or retirement.

In most cases, you can show proof of income by providing pay stubs, bank statements, 1099s and other documentation. Lenders may also look at your employment history to predict if your income is likely to continue.

Beyond this, some lenders may require you to have a minimum household income to qualify for a personal loan. For example, Discover requires its personal loan applicants to have at least $25,000 in household income. Additional income requirements depend on the lender you work with. 

Low Debt-to-Income Ratio

Your debt-to-income (DTI) ratio shows how much of your monthly income goes toward debt payments. Generally, a DTI ratio of 35% or lower is considered good, although some lenders may allow higher DTI ratios.

So how do you calculate your DTI ratio? Start by adding up your total monthly debt payments. This includes your credit card bills, mortgage payment, student loan payment, car loan and anything else. Then, divide that number by your gross monthly income. 

So if you earn $5,000 a month before taxes and $1,000 of your income goes toward debt payments, your DTI ratio is 20% ($1,000/$5,000 = 0.20). If $2,500 of your income went to debt payments, your DTI ratio would be 50%.

You’ll have a more difficult time getting approved for a personal loan or qualifying for a good rate if your DTI ratio is too high. If you’re hoping to improve it, you can work to pay off some of your existing debt or look for ways to increase your income. 

Sufficient Collateral for Secured Loans

Collateral is a valuable asset that you promise to give the lender if you can’t repay your loan. Some examples of collateral include your home, car or savings account. 

Collateral isn’t always a personal loan requirement, but lenders will mandate it if you take out a secured personal loan. Because secured loans are less risky for lenders — they can take your asset if you don’t pay the money back — they often have lower interest rates than unsecured personal loans.

With the requirements above, you may be wondering: Would I qualify for a personal loan? If you still aren’t sure, it may be a good idea to check your personal loan eligibility. This can help you avoid applying for loans that you’re unlikely to be approved for, which may negatively impact your credit score. 

Here are three easy tips for how to check your personal loan eligibility.

1. Prequalify on lender websites: Many lenders let you prequalify for a personal loan without doing a hard credit check. To prequalify, you’ll just need to enter some basic information about yourself and your finances to get an estimate of your potential loan terms.
2. Get your credit report and score: If you aren’t sure what your credit score is, it may be a good idea to request a credit report. You can request one for free from the major credit bureaus — Equifax, Experian and TransUnion — using the site AnnualCreditReport.com or via a free online platform like Credit Karma.
3. Use a personal loan calculator: There are many online personal loan calculators that help estimate your monthly payment and interest rate. Using one of these calculators can be a helpful way to gauge whether you can comfortably afford to take out a new loan.

Once you’ve checked your eligibility, it’s time to start gathering the necessary documents for your application. The documents you need for a personal loan application will often vary by lender. However, most lenders will require a set of documents similar to the following:

• A driver’s license or other government-issued ID: Lenders need to verify your identity and ensure you can legally borrow money. A driver’s license, which you can get from your local Department of Motor Vehicles, is the most common form of government-issued ID, but other forms like a passport may be accepted as well. 
• Proof of income, such as pay stubs or tax returns: You can submit things like pay stubs, tax returns or bank statements, or if you’re self-employed, 1099 forms can work as proof of income.
• Proof of identity, such as a birth certificate or Social Security number: A Social Security number is the most common form of proof of identity. But other documents, such as a birth certificate, may also be accepted. 

• Proof of address, such as a utility bill or bank statement: Usually a utility bill or bank statement is enough to verify your address. You can get a utility bill from your service provider and a bank statement from your financial institution. 

With these documents in hand, often the easiest way to get a loan is to apply online. You may also have the option to apply over the phone or in person at a local branch.

While a loan’s interest rate is an important factor, it’s not the only one. It’s wise to also consider repayment terms, fees and the lender’s reputation. Below, we’ll go deeper into each factor.

Interest Rate

Interest rate is a primary factor to consider when choosing a personal loan. This is the amount of money you’ll have to pay the lender in addition to the amount you borrow. The lower the interest rate, the less money you’re paying to borrow money from the lender.

Personal loan interest rates vary wildly depending on your credit score and the length of the loan. For example, Discover personal loan interest rates can range from 7.99% to 24.99% APR (annual percentage rate) as of this writing. That’s a huge range that can add thousands of extra dollars to the total cost of your loan depending on the rate for which you qualify. 

Repayment Terms

Another important factor to consider is the loan’s repayment terms. This is the length of the loan and how often you make payments. 

You should choose repayment terms that fit your budget. Longer loan terms may result in lower monthly payments, but you will generally end up paying more in interest over time. You’ll also want to consider how frequently you desire to be making payments. 

Fees

The most common fee you may see when applying for a personal loan is an origination fee. Origination fees usually cost a specific percentage of the overall loan amount and get taken out of your loan before it’s given to you. So if you apply for a $10,000 personal loan, you could end up with $9,900 to $9,800 once the lender subtracts the origination fee, if you’re charged a 1% or 2% fee, respectively. However, the fees you may face could be higher.

Lenders like Discover and LightStream don’t have origination fees, but others like Prosper and Axos Bank may. Consider reading the fine print before taking out a personal loan, and ask about any fees that may apply. 

Your lender may also charge prepayment penalties, late payment fees and insufficient funds fees. These can all add up over time and present an important factor to consider in your decision. 

Lender’s Reputation

There’s no shortage of personal loan lenders online. Make sure you pick a credible one by looking into their reputation.

This could include reading online reviews from customers and trusted third-party sites like the Better Business Bureau (BBB) or calling customer service before you submit your loan application to gauge response times and helpfulness and reading through the company’s fair lending practices.

Personal loans can be a helpful way to consolidate debt or finance a major purchase like a home improvement project, education expenses or even a new business venture. 

But make sure you understand the requirements and terms before you apply. Otherwise, you may find yourself with a loan that you can’t afford to repay, which can damage your credit score and lead to financial stress.

Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.