How to Get a Personal Loan: What You Should Know

If you’ve decided to take out a personal loan, we’ve outlined some key information that you need to know before you apply. This includes knowing what documents and information you’ll need during the application process, how to improve your chances of getting approved and how to find the best rate on a loan.

What Documents or Information Do You Need to Apply?

When you apply for a personal loan, you’ll need to fill out an application and provide information about yourself and your financial situation. Some of the documents and information you need to provide may include:

  • Proof of identity: driver’s license, passport, Social Security card or other government-issued forms of identification
  • Proof of address: utility bills or copy of lease agreement
  • Verification of income: W-2 or 1099 form, pay stubs, bank statements or last year’s tax returns
  • Personal information: address, email, phone, date of birth, Social Security Number
  • Loan information: loan amount, planned use of funds, loan term
  • Financial information: credit score, recent credit history, rent/mortgage details, existing debt obligations
  • Employment information: gross annual salary, employment status, employer’s address and contact information
  • Educational information: highest degree obtained and university where obtained, area of study, GPA

What Do Lenders Look For in Personal Loan Applications?

Your credit score and history will be one of the biggest factors in determining whether you’re approved and what kind of rate you’ll qualify for. In general, you’ll receive a lower rate if you have a higher credit score. As a refresher, a credit score of 680 or more is considered a “good” credit score. Lenders will also look at the length of your credit history, any recent delinquencies or bankruptcies and the number of open trades you have (i.e., credit card accounts, mortgage, any type of outstanding loan). Even though these factors make up part of your credit score, lenders will sometimes set specific requirements for these.

Many lenders will also look more broadly at your ability to repay the loan, including how much debt you carry relative to your income. This is what is known as a debt-to-income (DTI) ratio, and lenders will typically want to see borrowers with DTI ratios under 40% to 45%. Lenders may also look for “financially responsible” borrowers -- i.e., borrowers with good annual incomes who have positive cash flow and a demonstrated ability to save.

Some lenders are now evaluating educational and work history in addition to traditional criteria. Lenders may look at your area of study, the college or university you attended, your grade point average (GPA), your current job title and most recent job titles. The thinking behind using these metrics is that some types of careers have better stability and job security (which means you are more likely to repay in case of economic downturn), and that your job can be used to assess your personality and characteristics.

How to Get a Personal Loan With Bad or No Credit

Getting a personal loan will be harder if you have a poor credit score. However, there are a few ways you can overcome a poor credit score. First, consider getting a secured personal loan or a cosigner for an unsecured loan. While both of these strategies do have risks, they can help you help you get approved and qualify for a better rate. Second, demonstrate to lenders that you are making serious efforts to repair your credit by making payments on-time or paying down existing debt. Third, shop for a personal loan at a bank or credit union in your community, especially if you already have a relationship there. Your local bank or credit union may be willing to overlook some spots in your credit history if you’ve been banking with them for awhile.

How to Get the Lowest Interest Rates on a Personal Loan

There are a few strategies you can use to find the best rates on a personal loan:

  • Shop around: Make sure to check your rate at multiple lenders (this will usually not affect your credit score, but be sure to check with the lender first). Even getting an APR that’s one percentage point lower can save you a ton of money over the long run. Some lenders, like LightStream, will offer to match or beat another lender’s rate.
  • Consider personal loan alternatives: If you have great credit, you may be able to qualify for a 0% APR credit card or a good balance transfer card. These cards will allow you to pay down debt interest-free for a certain period of time. If you’ve fallen on hard times, there are community action organizations and religious groups that make grants or low-cost loans to individuals experiencing financial hardship.
  • Put up collateral or a cosigner: Securing a loan with collateral or having a cosigner can help borrowers with bad credit qualify for better rates. If you pursue either option, make sure that you can truly afford the loan before you apply, because you can stand to lose your house or vehicle (or whatever else you put up as collateral) or to ruin someone else’s credit.
  • Pay down existing debt: Since lenders care about your debt-to-income ratio, you should pay off as much debt as you can before applying. This includes any credit card float you may have. Credit card float happens when you wait until your payment due date to pay off your credit card, and even though you’ve accrued no interest, this still counts as active debt against you.

Allow yourself enough time to shop around for a personal loan and make your decisions carefully. This will help you take out a loan that makes sense for your financial situation.

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