Personal Loan Requirements [+ How to Apply]
Personal loans are among the most common and versatile loans that people apply for. They can be used for many different purposes, interest rates are fixed, and they can be obtained without collateral. Also, if you are approved for a personal loan, funds are usually disbursed quickly so you won’t have to wait long.
If you are considering applying, the following is an overview of the personal loan requirements you will need to meet to qualify and the steps for applying.
Personal Loan Requirements
Although each lender will have its own criteria for approving personal loans, there are some common things that all lenders consider. If you think you may have trouble meeting any of these personal loan requirements, you can take steps to improve your financial situation before applying to maximize your chances of loan approval.
Proof of Identify
Unfortunately, identity theft is a major problem in society. Someone could steal an identity, for example, obtain a loan, and then skip out on repayment. Because of this, lenders will verify your identity before issuing a loan to prevent fraud.
You may be asked to provide two forms of identification. Acceptable forms of government-issued identification include:
- Military ID
- State Issued ID
- Driver’s License
Your credit score is one of the most important factors that a lender will consider when evaluating you for a personal loan. Because most personal loans are unsecured, your credit score is used to determine the likelihood of loan repayment. Different lenders have different credit score requirements, but the minimum score to qualify is usually 610-640.
If you have a good payment history, it usually indicates that you will most likely make on-time payments on your personal loan. When evaluating your payment history, a lender will look for missed payments or anything else that could suggest a problem repaying your debts.
Employment and Income Verification
A lender will verify your employment and income history to make sure you can repay the money you borrow. Documents you can use for verification include:
- Pay Stubs
- Tax Returns
- Monthly Bank Statements
- Signed Letters from Employers
Before a lender will approve a personal loan, they will check that you currently don’t have too much debt. The more debt you have, the more likely it is that you may miss one or more payments. Your current debt will be evaluated using a metric called the debt-to-income ratio (DTI).
The DTI is very easy to calculate. You simply add up all of your monthly debt payments (credit cards, student loans, mortgages, etc.) and then divide the sum by your monthly gross income.
The DTI is always expressed as a percentage, and lower percentages are preferable. Interpreting the DTI is also very easy. If your DTI is 33%, for example, it means that 33% of your monthly gross income is going towards your monthly debts.
How to Apply for a Personal Loan
Applying for a personal loan is easy. It takes very little time, and most lenders now offer several ways you can apply.
Step 1: Review Your Credit
Before you apply for a personal loan, you want to make sure you have a strong credit score. The higher your score, the greater your chances of loan approval.
It’s also a good idea to obtain copies of your credit reports and review them for errors. If you find a problem, you may be able to have it corrected by disputing it with the reporting bureau.
Step 2: Pay Down Existing Debt (If Necessary)
Each lender will have its own DTI ratio requirements, but most prefer DTI ratios that are 35%-40% or less. If you calculate your DTI ratio and discover that it is high, you can reduce it by paying off existing debt. This will increase your chances of loan approval.
Step 3: Determine How Much You Want to Borrow
You will want to know exactly how much you need to borrow before you apply. If you intend to buy something with the money you borrow but you aren’t sure of the amount, contact the seller and find out. Be sure to include taxes and any extra fees in the total. This will prevent you from borrowing less (or more) than you need.
Step 4: Shop Around
Some lenders will offer you a loan with a better interest rate and terms than others. Because of this, it’s a good idea to check with several lenders to see which one will give you the best deal.
When you check out different lenders, it’s important that you don’t apply for loans with all of them. Each time you apply, a hard credit check will be performed. Too many hard credit checks in a short period will cause your credit score to go down.
Step 5: Apply
The next step is to submit a formal application for a personal loan. For your convenience, most lenders allow you to apply online, in person, or by phone. You should receive notification within 1-3 days informing you of the outcome.
Step 6: Obtain the Borrowed Money
If your application is approved, you can make arrangements to obtain the money. If your checking or savings account is with the lender you are borrowing from, the money can be transferred to your account. You can also pick up a check or have a check mailed to you.
Apply for a Personal Loan Today
Applying for a personal loan is a simple process. If you have any questions while applying, one of TEG Federal Credit Union’s representatives will be glad to assist you. A free credit review is also offered if you would like some help with tackling your debts before you apply.
In addition to being quick and easy to apply for, personal loans also have many benefits to consider over other forms of financing, like credit cards. Check out the following article for more information on how you can benefit from a personal loan.