5 Personal Loan Requirements To Know Before Applying

Most lenders have similar requirements for personal loans, although the specific qualification standards may vary by lender. For example, two lenders might consider your credit score, but one might require a higher credit score than the other. Here are some other common requirements they might consider:

• Credit score and history
• Income
• Debt-to-income ratio
• Collateral
• Origination fee

1. Credit Score and History

An applicant’s credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors like payment history, amount of outstanding debt and length of credit history. Many lenders require applicants to have a minimum score of around 600 to qualify, but some lenders will lend to applicants without any credit history at all.

2. Income

Lenders impose income requirements on borrowers to ensure they have the means to repay a new loan. Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.

Evidence of income may include recent tax returns, monthly bank statements, pay stubs and signed letters from employers; self-employed applicants can provide tax returns or bank deposits.

3. Debt-to-income Ratio

Debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower’s gross monthly income that goes toward her monthly debt service. Lenders use DTI to predict a prospective borrower’s ability to make payments on new and current debt. For that reason, a DTI less than 36% is ideal, though some lenders will approve a highly qualified applicant with a ratio up to 50%.

4. Collateral

If you’re applying for a secured personal loan, your lender will require you to pledge valuable assets—or collateral. In the case of loans for homes or vehicles, the collateral is typically related to the underlying purpose of the loan. However, secured personal loans can also be collateralized by other valuable assets, including cash accounts, investment accounts, real estate and collectibles like coins or precious metals.

If you fall behind on your payments or default on your loan, the lender can repossess the collateral to recoup the remaining loan balance.

5. Origination Fee

Though not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, running credit checks and closing. These fees usually range between 1% and 8% of the total loan amount, depending on factors like the applicant’s credit score and loan amount. Some lenders collect origination fees as cash at closing, while others finance them as part of the loan amount or subtract them from the total loan amount disbursed at closing.