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5 Typical Personal Loan Requirements

5 Typical Personal Loan Requirements
Sarah Li Cain
Sarah Li CainUpdated November 30, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Getting a personal loan can be a great option for those who need to fund a large expense at a lower interest rate than other forms of debt, like a credit card. It would be nice to borrow as much as you want, when you want, but lenders need some convincing to ensure they’ll get their money back (with interest). While requirements for personal loans vary from lender to lender, there is a list of common factors looked at. Let’s take a look at what they are so that you’re as prepared as possible when applying for a personal loan.

What Is a Personal Loan?

A personal loan is a type of debt borrowers can use for a variety of purposes, including home repairs, unexpected medical bills, or debt consolidation, among others. For many borrowers a personal loan may have lower interest compared to credit cards. How a personal loan works depends on whether it’s a secured or unsecured loan. Many personal loans are unsecured — you don’t need to put up any collateral to secure the loan. You can find unsecured personal loans from most financial institutions such as a bank, credit union, or online lender.

What Are the Usual Personal Loan Requirements?

How lenders qualify applicants and the weight of importance on their requirements will vary. With that in mind, here are what most lenders base their requirements of a personal loan from. 

1. Credit Score

A key factor lenders consider when considering whether to approve applications for personal loans is the applicant’s credit score. In most cases, lenders tend to approve loans with more competitive rates to applicants with higher credit scores. That’s because a credit score is an indicator of whether an applicant is responsible with credit — the higher it is, the less risky lenders perceive you to be.In many cases, lenders are more stringent with unsecured loans than secured ones. If you’re someone with a short credit history or low credit score, lenders may not readily approve you. Even if you qualify for a loan, it may be for higher interest rates and include origination and other fees. However, there are lenders that offer bad credit personal loans or review other financial factors such as your credit history and income.

2. Origination Fee

Some personal loan lenders charge an origination fee, which is used to cover the cost of originating, or processing your loan. Typically you’ll be charged a percentage of your loan amount, and typically ranges from 1% to 8%. Explaining personal loans’ origination fees may be best done with an example: If you borrowed $15,000 and were charged a 2% origination fee, you would pay $300. Lenders usually give you a choice whether to pay for the fee separate from the loan, deduct it from the loan proceeds, or include it in the balance of your loan. If included in the balance of the loan, it will accrue interest just as the principal amount accrues interest.Origination fees can add up, so be sure to shop around to avoid this fee if possible or try to choose a personal loan with the lowest origination fee. 

3. Collateral

Collateral is an asset or property whose value is used as a guarantee for a loan. In other words, a borrower is guaranteeing payment — in the form of the collateral — in the event they can’t pay back the loan. In case of default, the lender has the legal right to recoup their losses by seizing the asset or property. Secured personal loans require collateral, whereas unsecured loans don’t. By putting up a tangible asset, lenders will take its value into consideration as part of a loan application. When deciding on the type of loan you want, consider whether you want to risk losing your property or asset for a secured loan in exchange for a potentially lower interest rate. 

4. Proof of Income and Employment

In addition to assessing whether you’re responsible with credit, lenders want to see that you have adequate income to pay back your loan. Proving how much you make can affect the loan term and interest rate you’ll qualify for. Income verification will vary depending on the lender’s requirements, but is typically accomplished by providing the lender with pay stubs, a federal W-2 form, or bank statements, and the lender may contact your employer to verify the information you provide. 

5. Debt-to-Income Ratio

The debt-to-income ratio (DTI) compares your gross monthly income to your monthly debt payments. Lenders usually prefer a lower DTI since it shows that you’re not stretched too thin financially and it appears as though you’re able to afford to take on more debt. To calculate your DTI, take your monthly debt payments and divide it by your gross monthly income. For example, if your gross income is $5,000 per month and you pay a total of $1,000 towards a combination of credit card and student loan debt, your DTI would be 20%.

Typical Personal Loan Documents

When you’re ready to apply for a personal loan, lenders will also ask for some documentation to confirm details about your identity, employment, and residence.

Loan Application

Lenders require applicants to fill out and submit a loan application form to start the lending process. This formal document will ask for basic information such as your full name, address, Social Security number, desired loan amount, and the loan’s purpose. Depending on the lender, you may be asked to submit a paper or electronic application. Many online lenders offer the opportunity to go through the entire application process online, while some may ask you to speak on the phone with a representative before finalizing their decision. 

Proof of Identity

Applicants typically need to provide two types of government-issued ID to prove they are a U.S. citizen (or permanent resident if it’s part of the lender’s eligibility criteria) and they meet the age requirements. Lenders typically accept the following types of ID: 
  • State-issued ID.
  • Driver’s license.
  • Certificate of citizenship.
  • Passport.
  • Military ID.
  • Birth certificate.

Employer and Income Verification

One of the main requirements of lenders is for borrowers to have enough income to pay back their current and new debts. Lenders will ask for proof, such as documentation verifying your employment and income, typically in the form of a pay stub, tax return, bank statements, federal W-2 form, and your employer contact details. 

Proof of Address

Lenders want to ensure that you’re in a stable living situation. Not having one could signal to a lender an inability to pay your loan. Plus, it’s a way to ensure lenders can find you in the event you default on your loan. In general, acceptable documents to prove your address include a copy of your rental agreement; mortgage statement; a current utility bill; home, rental or auto insurance bill; or your voter registration card. The document will need to include your name and physical address. 

Applying for a Personal Loan

Before applying for a personal loan, there are steps to take so you can get the best rates and terms for your financial profile. Ensuring you have a stable income and as high a credit score as possible are both good means to qualify for the best rates and terms. 

Stable Income

If you’ve had gainful employment for the past few months (or even a year or more is great), you may be able to prove to lenders you have sufficient income to pay back your debts. Self-employed individuals will want to look at their bank statements and tax returns for the past few years to see whether it counts as sufficient proof for lenders. 

Checking Your Credit Score

You’ll also want to check your credit report (you can do this for free at AnnualCreditReport.com) to see what factors may be affecting your score. If you find any discrepancies in your credit report, you can file a dispute with the credit bureau that reported the information. Some tips to improve credit scores include making on-time debt payments and paying down your balance. You might also consider asking for a higher limit on your credit cards, which may reduce your DTI.

Preapproval

Many lenders have a preapproval option, which involves conducting a soft credit check and doesn’t affect your credit score. So you can shop around and customize your quotes with different lenders before picking one that’s the best fit and not worry about your credit score being negatively affected. 

The Application Process

After getting prequalified, you’ll want to conduct personal loan comparisons and select the one you want to go with. Make sure to read the fine print so that you understand the loan agreement. Once you’ve decided on a term, rate, and monthly payment you’re happy with, gather up all required documentation to begin the formal application process. You’ll usually need to provide proof of income, employment, and address — check with the lender for acceptable documents. 

The Takeaway

Finding reputable personal loan lenders is fairly simple thanks to online marketplaces like Lantern by SoFi. After entering some details about yourself, including the intended use of the personal loan, you’ll be able to see a list of lenders you can browse through and compare the ones that are best suited for your financial situation. While personal loan requirements vary from lender to lender, most lenders will look at the applicant’s credit score, income, DTI, and collateral (for a secured loan). The more insight you have into what lenders want and what makes you creditworthy, the more prepared you’ll be when applying for a personal loan, and be aware of rates and terms you might be eligible for. Compare personal loan lenders at Lantern by SoFi.
Photo credit: iStock/Chainarong Prasertthai
SoFi Loan Products SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636. For additional product-specific legal and licensing information, see SoFi.com/legal.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC1021249

About the Author

Sarah Li Cain

Sarah Li Cain

Sarah Li Cain is a finance writer and podcast producer focusing on topics such as credit, insurance, investing, and real estate. Her work has appeared in major publications such as CNBC Select, Forbes, Redbook, and Business Insider.
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