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How to Qualify for Personal Loans

Loan Advice
How to Qualify for Personal Loans

Not everyone is eligible for a personal loan, but when you want to borrow, this would be what most would prefer. This type of loan offers the best interest rates, but it’s also reserved for borrowers that would be considered the least amount of risk. 

When it comes to qualifying for personal loans, these are usually reserved for people with a good credit score. If you’re applying to a bank, they often look for people with at least a credit score of 720, and more often  it can be closer to 740 or more. 

While this isn’t the only criteria, it is one of the first considerations for many lenders. This tells them about an individual’s creditworthiness, and the likelihood that they would be able to make their payments in full and repay the loan. 

Getting Started with Personal Loans

Before you start looking for loans, you should take the time to find out your credit score. This can be useful for a few reasons, including to help prequalify your personal loan request. 

  1. Knowing your credit score will help you to apply for the right loan you might qualify for
  2. Being aware of your credit score can help with the amount and term to consider

Get Started: Apply for Personal Loan

Since the amount applied for and term (how long you might borrow) are also considerations that can impact your loan request, even if you qualify but it’s on the low side you might find that getting approved to be a challenge. Fortunately, there are alternative borrowing options. 

Alternatives to Personal Loans

When it comes to borrowing, a personal loan is not your only option. There are other types of loans along with using the equity in your home, a line of credit, credit cards and more that can provide for you. It just depends on what you have access to, your needs, and how much you might want to borrow. For example, some might choose to use credit cards for a large purchase, especially if they had the funds in their account to pay off some or all of the card soon. This could prove beneficial based on points, perks or rewards that are part of the card. 

But if you are looking for alternatives because you have a fair or poor credit score which prevents you from qualifying for a personal loan, one of the other options used by many would be installment loans. The installment loan is very similar to a personal loan with just a couple of differences. An installment loan is for someone that might have a credit score of fair or good, but not good enough to get a personal loan. 

Get Started: Apply for Installment Loan 

Since it takes good to excellent credit to qualify when applying for personal loans you have the option of requesting an installment loan, which is suited for those with fair to good credit.

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If your credit score is poor and below 600 you might find installment loans to be an option, but often your loan request might be more suited to payday loans, where lenders will often have no credit check required and look at alternative data and your spending habits to determine whether you would be suitable to borrow. 

RELATED: Installment Loans vs Payday Loans 

While a payday loan is a higher interest alternative, when lenders won’t approve your application it is another option. One issue is these tend to have a short repayment period and require that it is repaid on your next payday in full, the amount borrowed plus interest. This can create an issue for some that can lead to a debt cycle. This type of loan is often not advised and should be considered a last resort option. 

Requirements When Applying for Personal Loans

If you have checked your credit score and assume that you could qualify for a personal loan there are a few other considerations often used by lenders.

Credit Score and History

As mentioned, your credit score is a major factor with lenders that are looking at your application. This would also include your history, such as your ability to make payments on time and the length of your credit history. 

Income

Your income and what you bring home each month is also a factor for what amount you might be able to borrow. Lenders will often allow up to a percentage of your monthly income, knowing that you have other bills, expenses and financial commitments. Sometimes if you have trouble getting approved, it can make the difference in adjusting the term to borrow, or the amount. This would be related to your monthly expenses and what is assumed you can afford. While taking a longer loan term can lower your monthly payments, it should be clear that the interest will increase the overall cost of borrowing. 

Debt-to-income Ratio

Your overall Debt-to-income Ratio (or DTI) isn’t part of your credit score, but it is something that lenders will review and consider when evaluating your loan request. If you carry too much debt, then lenders may presume that payments for this can take too much of income for your non-essential like rent/mortgage, food, and similar, which can make you more of a risk as lenders see it, and uncertain whether you can make your loan payments. 

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Another consideration can be your credit utilization, which is different to your DTI, and best explained as the percentage of credit available to you that is used. 

RELATED: How a Credit Utilization Ratio Can Affect Your Loan Request 

Loan Fees

Many lenders have fees involved with personal loans, from origination fees or processing fees to other loan costs like a prepayment penalty that are important to be aware of before signing a loan agreement and moving forward. When you apply for a personal loan you have the opportunity to read your agreement (by law) before signing. This would tell you things such as your payment schedule, monthly amount due, interest rates, APR and more. You should always read your agreement before you sign.

RELATED: Why Your Loan APR Can Be Different Than the Interest Rate 

As you consider your options for a personal loan you should also become familiar with your options and ability to qualify for good interest rates with personal loans. The following can help with being semi educated on the topic and help with making the right choice. 

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The more that you are able to prepare or educate yourself prior to the process of borrowing a personal loan or installment loan the more likely it is that your request might be approved. If you are unaware about things like credit score, debt to income ratio, credit utilization and other terms or aspects of borrowing, you will have a more difficult time getting approved. If you are genuinely interested to get an online loan, it is in your best interest to learn about the many different parts for prequalifying, the approval process, how your credit score can influence your odds of being approved and much of what has been laid out for you in this article.

Recommended Reading for Comparing Personal Loan Options:

When looking to borrow any type of the loan, the more you learn can help you save or make costly mistakes when borrowing.

 

Wizard of words, macchiato maven, soothsayer, naysayer, aspiring wordsmith and Head of Content Marketing at GoodCheddar.

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