Key Eligibility Criteria for Personal Loans

Key Eligibility Criteria for Personal Loans

Lenders use eligibility criteria to assess risk and see whether they should grant you a personal loan. From credit score to income, the requirements can vary significantly between creditors.

Here are some of the most common personal loan requirements to give you a better idea of what to expect when applying for a loan.

Age requirements

There is no maximum age limit, but you must be at least 18 years old to legally sign a loan contract. During the application process, lenders require you to show them two or more forms of government-issued identification, such as the following:

  • Passport
  • Birth certificate
  • Driver’s license
  • Certificate of citizenship
  • Military ID

Can I get a personal loan if I’m not 18?

While you can’t get a personal loan by yourself, there are still a few ways someone underage could obtain a loan or extra funds.

  • Federal student loans: These don’t require you to be 18.
  • Private student loans: Private student loan lenders require underage applicants to have a co-signer who is an adult.
  • Secured credit card authorized user: Even if you aren’t over 18, an adult may add you as an authorized user on a secured credit card.

Income requirements

One factor that creditors evaluate is your income. If a borrower has a steady stream of high income, then they are more likely to be able to manage the repayment terms and repay the entire loan.

If you have a low income, it can be harder to be approved for a personal loan. Lenders might set a higher interest rate in a more stringent repayment plan.

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Employment status

Showing proof of employment can raise your chances of obtaining a personal loan. However, lenders may reject your application based on what your job is if they believe that you won’t be able to comfortably repay the personal loan over time.

Your employment status and type can affect whether you get a loan, your repayment terms, and how large of a loan you receive. When giving information on your employment, you may be asked to provide the following:

  • Previous two years of tax returns: W-2s or 1099s
  • Pay stubs
  • Bank statements
  • Employer contact information

Here are several common ways lenders look at different kinds of employment.

Full-time

A full-time worker generally has the most career and financial stability of all the different kinds of employment. This increases your chances of receiving a personal loan with better terms and a greater loan amount.

Part-time

A part-time worker typically has a lower income. Working part-time can make lenders less likely to give you greater loan amounts because you are seen as having less financial stability.

No employment

Many lenders will not approve your application if you are currently unemployed or have been unemployed for a long time. You may have more trouble finding a loan with favorable terms. If you have good credit, it may be able to balance out a lack of employment.

Contractor

Lenders may assess the kind of contract work you do to see whether you belong to a category with high loan default risk.

  • Subcontractors, such as construction workers, take on commission gigs with some of the highest rates of worker injury in any industry.
  • Company contractors may work for other companies, but have their own registered businesses and are not technically employees. They may receive less stable income.
  • Freelancers are also contract workers who often work with clients on a case-by-case basis, making their income less stable.

Creditors generally consider contractors as a higher risk group in terms of whether the borrower is likely to default on a loan. Being a contractor doesn’t necessarily disqualify you from applying for a personal loan, but it can make it more difficult depending on which lender you are seeking a loan from.

Self-employment

Lenders may look at how exactly you are self-employed and what kind of work you do to evaluate the likelihood of you paying back debt. Your financial situation can be assessed based on any income information you provide upon applying for a personal loan.

Certain industries can be looked upon more favorably than others by lenders. For example, the average analyst has a higher average income than the average graphic artist, so lenders may be more willing to give an analyst a higher loan amount.

Credit score

Perhaps the most essential eligibility criterion for most lenders is your credit score, which is a three-digit score ranging from 300 to 850. The higher your credit score, the greater your creditworthiness, which is essentially your likelihood of repaying a loan.

Bad Credit: 580 and lower. Personal loans are generally more challenging to obtain if you have bad credit. Lenders will view you as a higher-risk borrower, which means higher interest rates and lower loan amounts.

Fair Credit: 580 - 670. The average credit score is around 710. If you have a fair credit score, you may not be eligible for some loans with greater amounts.

Good Credit: 670 and above. Having good credit raises your chances considerably of obtaining a personal loan.

Excellent Credit: 800 and above. It’s fairly difficult to have a credit score of over 800, but it serves to tell prospective lenders that you are highly likely to repay any loan that you take out.

You can increase your credit score by making on-time payments to repay debt and finishing repayment plans without a hitch. It’s still possible to get loans with bad credit.

Debt-to-income ratio

Your debt-to-income (DTI) ratio expresses what percentage of your income currently goes towards repaying debt. The greater your DTI, the less likely a lender will be willing to grant you a new personal loan.

The typical maximum DTI ratio lenders are willing to accept is roughly 40%. If you find yourself having trouble with other debt, a debt consolidation loan could be helpful depending on your individual situation.

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Citizenship and residency

Citizenship is not necessarily required. Non-US citizens may be able to apply for a personal loan, though this eligibility requirement varies from lender to lender.

Generally, creditors willing to lend to non-US citizens need you to meet other criteria, such as if you have a certain visa or employment status. When you apply for a personal loan, make sure you have the proper paperwork on hand.

Collateral

Collateral is required in secured personal loans. It serves to secure the loan in case you default on it, unable to finish the repayment terms.

Collateral can be nearly any valuable asset you own, such as:

  • Property
  • A car title
  • Collectibles
  • Jewelry

Lenders will take into account how much your collateral asset is worth when deciding how much of a loan to grant you. You might be able to receive a loan worth half the valuation of your collateral asset.

At the end of your loan tenure, if you’ve repaid the loan successfully, you won’t lose your collateral. If you are ever considered defaulted on the loan though, the lender may seize the collateral to recoup losses.

If you don’t have any assets that you can or are willing to offer as collateral, it might be a good idea to look into alternatives. For example, unsecured personal loans don’t necessitate collateral, though they may come with less favorable repayment terms and interest rates.

Loan purpose

While end use is highly flexible when it comes to personal loans, there are some exceptions in which lenders will reject your application.

Here are the most common reasons loan purposes result in a denied application.

College tuition

You typically can’t use personal loan funds for paying tuition. This is because most personal loan lenders don’t want to deal with the red tape hassle of following federal regulations surrounding loans for college tuition.

If you want funds to finance higher education, both federal and private student loans may be able to help you acquire the necessary funds.

Federal student loans usually have better repayment flexibility, deferment opportunities, and low interest rates. However, defaulting on a student loan can result in severe consequences.

Down payment

Lenders won’t allow you to use your personal loan to make a down payment on a house unless the loan is a mortgage. If you want to finance a house, make sure you’re obtaining a mortgage, which is a specific kind of secured loan that requires collateral and has stricter conditions.

Business purposes

Many creditors will reject your personal loan application if you cite your loan purpose as a business-related one. If you need extra funds to pay off business expenses, a business loan might be able to provide you with financial support.

Remember to not lie about your loan purpose because if the lender finds out, you will face consequences such as losing your loan funds, having to pay everything back immediately, and even going to prison in some cases.

Previous loan history

Similar to your credit score, your previous loan history can give lenders insight into whether they should grant you a personal loan. If you’ve defaulted on a loan, that mark can stay on your record for up to seven years.

If you apply for a personal loan, you can expect lenders to pull up your credit report to see your pertinent financial information.

It may be helpful to prepare an explanation in case they ask you about your loan history since loan defaults are red flags to lenders.

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Other requirements

Each lender has their own requirements and limitations. Check with the lenders you want a loan from to see what terms and eligibility criteria they publicly share.

Origination fee

When applying for a loan, you might be expected to pay additional fees. One such fee is the origination fee, which lenders may charge you to process your loan application. This is usually a one-time fee that is either a flat rate or worth up to 10% of your loan amount.

Proof of identity

You can expect to be asked for proof of identity documents when you are in the application process. Prepare to provide an official ID and/or your Social Security Number.

Fine print

Your lender may specify other requirements in your approval letter and loan agreement. Take care to read the fine print so you don’t bind yourself to a contract with harsh terms and conditions.

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Common pitfalls

Many borrowers make mistakes after they’ve been pre-qualified for a personal loan by a lender.

Keep the following points in mind when applying for a loan to potentially increase your chances of obtaining a favorable loan:

  1. Don’t ignore your lender’s request for information
  2. Don’t lie to your lender about your loan purpose
  3. Remember to notify your lender of changes in circumstances (e.g. your employment)
  4. Make sure you shop around for loans to see which terms are most competitive
  5. Try not to make too many loan applications at once since they can add up and hurt your credit score
  6. Don’t take out a large loan you don’t need. Large loan amounts can make it harder to get approval

Personal loan eligibility FAQs

Can I get a personal loan with bad credit?

Yes. It may have less favorable terms than if you had good credit, but you can still be approved for a loan with poor credit. Getting a co-signer to sign the loan agreement with you is one way to increase your chances.

How do I check my loan eligibility?

You may want to do a pre-check online to see your chances of getting a loan or apply officially with your lender of choice. The pre-approval process can include a soft inquiry, in which lenders prescreen your credit report without it changing your credit score. Pre-approval can grant you tentative eligibility.

The official approval process can tell you for certain whether you are eligible for a personal loan with that lender. Lenders make a hard inquiry when you formally apply, which generally causes a dip in your credit score for a few months.

Can I get denied a loan after being pre-approved?

Yes. As convenient as online pre-qualification is, the circumstances can change and you may be denied the loan after actually applying for the loan.

What disqualifies me from getting a personal loan?

Common disqualification reasons include bad credit, unstable employment history, low income, and a lack of the necessary application documents.

About The Author

Ru Chen avatar

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.


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