From weddings to home repairs, you can use a personal loan to finance almost any type of purchase. A personal loan is usually a fixed-rate, unsecured installment loan. Unsecured means it’s not backed by collateral (like a house or car), and fixed-rate means that the interest rate stays the same over the life of the loan. Some lenders can place restrictions on using the personal loan proceeds for certain expenses, such as post-secondary education and business purposes
To qualify for a personal loan, you need to meet a few requirements. These can vary by lender, but they usually involve your credit score, credit history, debt-to-income ratio, age and income. You may also need to submit certain documents. Let’s look at these requirements and the personal loan application process.
Lenders consider your credit score and credit history when deciding whether to approve you for a personal loan. Your creditworthiness can also impact the loan terms.
Credit score and credit history requirements can vary from lender to lender. But generally, a higher credit score and positive credit history mean they’re more likely to approve you.
Your credit score and history can signal to lenders that you’re a reliable borrower. Lenders want to know that you can repay a loan and make on-time monthly payments. A history of on-time debt payments – such as for credit cards and student loans – can demonstrate that you’re a responsible borrower.
If approved, the interest rate you receive can also depend on your creditworthiness. A higher credit score can mean you’re more likely to get a lower interest rate.
Lenders will look at your debt-to-income ratio (DTI) when you apply for a personal loan. Your DTI is the percentage of your gross monthly income that goes toward debt payments. Lenders use this number to evaluate your ability to comfortably afford new loan payments and decide whether you can take on more debt. As with credit score and credit history, lenders use an applicant’s DTI to assess the likelihood they’ll repay the loan.
As with creditworthiness, DTI requirements can differ by lender. Your DTI can also impact your interest rate.