Personal loans are becoming increasingly popular, with approximately 20.2 million borrowers in the U. S. alone. Before you start looking for a loan, it's important to familiarize yourself with the common requirements you'll need to meet and the documentation you'll need to provide.
This knowledge can help streamline the application process and can improve your chances of qualifying. An applicant's credit score is one of the most important factors a lender considers when evaluating a loan application. Credit scores range from 300 to 850 and are based on factors such as payment history, amount of outstanding debt and length of credit history. Many lenders require applicants to have a minimum score of around 600 to qualify, but some lenders provide loans to applicants without any credit history. Evidence of income may include recent tax returns, monthly bank statements, pay stubs, and letters signed by employers; self-employed applicants can file tax returns or bank deposits. The debt-to-income ratio (DTI) is expressed as a percentage and represents the portion of a borrower's gross monthly income that is spent on monthly debt servicing.
Lenders use DTI to predict a potential borrower's ability to make payments on new and current debts. For that reason, a DTI of less than 36% is ideal, although some lenders will approve a highly qualified applicant with a ratio of up to 50%.If you apply for a secured personal loan, your lender will require you to commit valuable assets or collateral. In the case of home or vehicle loans, the collateral is usually related to the underlying purpose of the loan. However, secured personal loans may also be secured by other valuable assets, such as cash accounts, investment accounts, real estate and collectibles such as coins or precious metals.
If you fall behind on your payments or do not repay your loan, the lender can recover the collateral to recover the remaining balance of the loan. Although not part of the qualification process, many lenders require borrowers to pay personal loan origination fees to cover the costs of processing applications, conducting credit checks, and closing. These charges generally range from 1% to 8% of the total loan amount, depending on factors such as the applicant's credit score and the amount of the loan. Some lenders charge opening fees in cash at closing, while others finance them as part of the loan amount or subtract them from the total loan amount disbursed at closing. Prospective self-employed borrowers should rely on bank statements, 1099 forms, and income tax returns. A lender may deny your personal loan application for several reasons.
Your credit score may be too low or your DTI may be too high. You may also have borrowed more money than the bank believes you can repay based on factors such as income, job stability and other outstanding debts. Not only is your income a crucial part of the lender's qualification process, but it's also essential for you to be able to repay your loan. Most lenders require proof of income to confirm their ability to meet repayment obligations. If you do not have a job or an alternative source of income and cannot afford to apply for a personal loan, it is better to avoid incurring additional debts. Personal loan denials vary, but the most common reasons are related to your credit score, credit history, and income.
Potential borrowers who have poor, damaged, or lacking credit usually struggle to qualify for a personal loan. However, even if you have good credit, that doesn't mean you qualify for a personal loan. If your income doesn't show that you can afford monthly payments, lenders are generally not willing to take the risk. You may know some of these things through your head, such as your income, but there are others you'll want to look into before you apply for your loan, such as your credit score. A good credit score and credit history show lenders that you pay your credit obligations on time.
The better your credit, the better your chances of getting a loan on the most favorable terms. The best terms can save you thousands of dollars over the life of the loan. Of course, you have to know how much you bring home each month to know if you can afford the monthly loan payments. Remember to include all sources of income - not just your main source - such as spousal income, child support payments, second job earnings or self-employment income. Your income is only part of the equation; it's also important to know your monthly debt obligations. If you want to apply for a joint or co-signed loan, you may need to provide the same information for your additional applicant as you did for yourself - including their social security number and proof of income - and we may contact your current and former employers as references or to verify income and dates of employment. Increasingly popular personal loans offer many benefits - from debt consolidation options with no fees from Marcus by Goldman Sachs - but there are 10 questions you should ask yourself before applying for one:
- What is my current credit score?
- What is my current debt-to-income ratio?
- Do I have any collateral I can use?
- Do I have any origination fees?
- What is my current employment status?
- Do I have any other sources of income?
- How much money do I bring home each month?
- What are my current monthly debt obligations?
- Do I need an additional applicant?
- What interest rate am I eligible for?
Marcus allows you to send money directly up to 10 creditors and then deposit any additional money borrowed into your linked bank account. Your interest rate depends on several factors - including your credit score - as well as the amount borrowed and term length (time during which you will repay). Interest rates can be as low as 3.49% and as high as 29.99% or more; typically those with good or excellent credit will get lower rates. Before applying for any type of personal loan it's important that potential borrowers understand all requirements needed in order to qualify - from having good credit scores and low debt-to-income ratios - in order to get approved on favorable terms.
