4 Steps to Pre-Qualify for a Personal Loan

What information to have before applying for a loan

Before you begin the process of applying for a personal loan, gather all the documents and information you need along the way. Doing so will allow you to move through each step of the process efficiently and get your funds as quickly as possible. 

The items you may need include the following:

  • Personal identification, such as a driver’s license, Social Security card or passport.
  • Proof of income, such as W-2s, paystubs or filed tax returns.
  • Employer’s information, including the company name, your manager’s name and the phone number.
  • Proof of residence, such as a utility bill with your name and address or a lease agreement.

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Check Your Eligibility

Visit lender websites or make phone calls to determine if your financial profile makes you eligible for a loan from that lender. Find out if there is a minimum required credit score and whether there is an income threshold. Determine if there’s a required minimum length of credit history—three years or more is common—and what is considered an acceptable debt-to-income ratio.

How to Qualify for A Personal Loan

So, is it hard to qualify for a personal loan? Here are 4 tips to help you get prepared to qualify for a personal loan.

  1. Get a copy of your credit report: Staying up-to-date on your credit isn’t just important for your overall finances, it will help you figure out where to apply and how much you should ask for in your application. Also included in your credit report will be your credit score, which is often a key element in your application.
  2. Stay up-to-date with your payments: Your payment history is one of the most important factors in your credit score, which means it’s also an important factor in a personal loan application. If you have a history of making your payments on-time, you may be more qualified for a personal loan.
  3. Be mindful of your debt-to-income ratio: Your debt-to-income ratio is also an important factor when applying for a personal loan. A low debt-to-income ratio can increase your chances of qualifying.
  4. Keep that paycheck (or any proof of income) handy: You may not be asked to show any proof of income, but having it in hand will help you provide a more exact estimate of your gross income.

Why it matters 

Lenders look at your debt-to-income (DTI) ratio when they’re evaluating your credit application to assess whether you’re able to take on new debt. A low DTI ratio is a good indicator that you have enough income to meet your current monthly obligations, take care of additional or unexpected expenses, and make the additional payment each month on the new credit account. 

What it is

Conditions refer to a variety of factors that lenders may consider before extending credit. The conditions may include:

  • How you plan to use the proceeds from the loan or credit account.
  • How your loan amount, interest rate, and term may be impacted by market conditions or the state of the economy.
  • Other factors that may impact your ability to repay the debt ― for example, a mortgage lender wants to know if the property you’re buying is in a flood zone or in an area prone to wildfires.

Typical Personal Loan Documents

When it’s time to formally apply for a personal loan, your lender will request a number of documents to confirm everything from your identity to your residence and employment. Here are the most common documents lenders require as part of the personal loan application process.

Loan Application

A loan application is a formal document that lenders require prospective borrowers to complete and submit to begin the lending process. Each lender has its own application, so the specific requirements may vary. In general, though, you’ll need to provide basic personal information, how much you want to borrow and the purpose of the loan.

The format of a loan application may also vary by lender. While there are numerous online lenders that offer a completely online application experience, others may need to discuss your application over the phone before providing a decision. There are also a number of brick and mortar banks and financial institutions that require applicants to submit a paper application in-person.

Proof of Identity

Most lenders require applicants to provide at least two forms of government-issued identification to prove they are at least 18 years old and a United States citizen. This precaution also reduces the threat of identity theft. Acceptable forms of government-issued identification often include:

  • Driver’s license
  • Other state-issued ID
  • Passport
  • Certificate of citizenship
  • Birth certificate
  • Military ID

Employer and Income Verification

A lender wants to see that you have the ability to pay back your current debts as well as the new loan. To do this, lenders typically require prospective borrowers to demonstrate their employment history and current earnings as part of the application process. Common forms of income verification for traditional employment include:

  • Paystubs
  • returns
  • W-2s and 1099s
  • Bank statements
  • Employer contact information

Prospective borrowers who are self-employed must instead rely on bank statements, 1099 forms and income tax returns.

Proof of Address

In addition to confirming your employment, most lenders want to know that you have a stable living situation. This may involve providing proof of your address, including a recent utility bill, a copy of your lease or other rental agreement, voter registration card or proof of home, rental or auto insurance that lists your address.

7. Do I have a good enough credit score?

Before you start applying for personal loans, it's important to know your credit score to make sure you can qualify. Most personal loan lenders are looking for applicants to have a good credit score, particularly online banks. However, if you have an existing relationship with a bank, you may get approved for a favorable deal if you have a good history of paying bills on time and honoring the terms of your past loans and accounts. 

Sometimes, credit unions will offer lower interest rates on personal loans and work with borrowers who have fair or average credit scores. But you often need to become a member and sometimes you need to open a savings account before you can qualify for a loan.

For people who don't have a great credit history, Upstart accepts applicants who have insufficient credit history or don't have a credit score at all. You will likely pay higher fees and interest rates than if you had a good credit score, so be sure to clearly read the terms and conditions before you sign on for the loan.

4. How much will I pay in interest?

Your interest rate depends on a number of factors, including your credit score, loan amount and your term (length of time you'll be paying the loan back). Interest rates can be as low as 3.49% and as high as 29.99% or more. Typically, you'll get the lowest interest rate when you have a good or excellent credit score and you choose the shortest repayment term possible. 

According to the Fed's most recent data, the average APR for 24-month personal loans is 9.39%. This is often well below the average credit card APR, which is why many consumers use loans to refinance credit card debt.

Personal loan APR is most often fixed, which means it stays the same for the life of the loan.

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. Compare loan offers

Once you submit your information, you may receive some information if you prequalify, such as …

  • Loan amount you may qualify for
  • Estimated monthly payment amount
  • Estimated interest and fees
  • Estimated annual percentage rate, or APR
  • Loan term

Again, it’s important to remember that these are potential offers and tentative rates and terms. You’ll get definitive information about the loan a lender’s willing to offer you only after you formally apply directly with the lender.

Things to consider

When you’re reviewing your loan options, be sure to compare

  • APR — This is how much it will cost you to borrow money, including the interest rate and any potential fees. Learn more about APR and why it’s important.
  • Loan term — Generally, loans with a longer term have a lower monthly payment. But they could cost more in interest in the long run.
  • Origination fee — Some lenders charge this fee for making a loan.

All of these factors can affect the total cost of your personal loan.

Personal documents you need to take out a loan

Lenders will typically require that you submit documentation to verify your information when going through the personal loan process. Here are a few documents you can expect to provide:

  • A loan application: The first step in getting a personal loan is to submit an application to a lender. This form should include your personal information, but also the reason for your loan, your credit score and income. After you turn in your application, your potential lender may contact you to verify the information you have provided.
  • Personal identification: You’ll typically need to prove to lenders that you are who you say you are. You may need to provide government-issued IDs, such as your driver’s license, birth certificate or passport, as well as your social security number.
  • Proof of address: Lenders may want to know where you live so they can send you bills and contact you. You may have to provide documents such as a copy of your lease agreement or utility bill to prove that you live at the address you stated.
  • Proof of income: Lenders want to know that, if they lend you money, they’ll be repaid. Your income can give lenders insight into whether you are able to repay the loan. To verify this, you may have to give documents such as W-2s, pay stubs or tax returns.

Are Personal Loans Secured?

Personal loans are typically not secured. This means that you don’t need collateral such as your house or car to secure the loan. Instead, you receive the loan based on your financial history, including your Fico score, your income, and any other lender requirements you must meet.

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