How to get approved for a personal loan

You've looked at the situation and decided a personal loan is the right tool for the job. You may be approaching this with some hesitation, however—especially if past financial decisions or a few credit bumps are still weighing on you. That’s understandable, but don’t give up hope. 

Instead, learn about the factors that go into getting approved for a personal loan, so you can feel more confident about applying. It’s possible to get approved for a personal loan even after a previous denial. 

Let’s look at the big picture of how to get approved for a personal loan and how you can prepare today to boost your chances.

What determines personal loan approval? 

Lenders want to know that you can—and will—repay your loan. To figure this out, lenders will look at your personal finances and credit history before making a lending decision.

Approval factors for personal loans:

• Credit. Lenders will look at your credit score and overall credit history 

• Debt-to-income (DTI) ratio. How much debt you already have as a percentage of your income

• Income stability. Proof of your income from a job or self-employment

• Loan amount. Smaller personal loan amounts might be easier to get approved 

• Documentation. Be ready to show financial documents, like your paycheck stubs and bank account statements 

Here’s a closer look at each of these primary factors for how to get approved on a personal loan. 

Credit 

Your credit history tells lenders about how you've handled credit in the past. Lenders check your credit reports and credit scores to see if you make debt payments on time and whether you're using a lot of your available credit. 

Most lenders require a credit score of 620 or higher to get approved for personal loans. Some lenders specialize in bad credit personal loans, but they tend to cost more money in interest and fees. 

Debt-to-income (DTI) ratio

Lenders won't give you a loan if they don't think you can afford to repay it. They use your debt-to-income (DTI) ratio to figure out how affordable your current debt is, and whether you could handle a loan payment on top of it. 

DTI measures how much of your monthly income goes to debt and housing. For example, if you make $5,000 per month and your total debt payments—plus housing—are $2,000 per month, your DTI is: $2,000 / $5,000 = 0.4 = 40%.

A DTI of 36% or lower is generally considered good and likely to get approved for a personal loan. Some lenders will also offer personal loans to people with a DTI up to 43%. A DTI over 50% could make it very hard to get a new personal loan.

Income stability 

Lenders will typically want proof that you have reliable income. This could include recent paycheck stubs from your employer, bank statements with regular deposits, or recent tax returns. 

Loan amount 

How much you ask to borrow is a big part of getting approved. Lenders won't give you more than they think you can pay back. The larger the loan, the more the monthly payment will increase your DTI. If you ask for a loan that pushes your DTI over the lender's limit, you could be denied. Higher personal loan amounts might also require a higher credit score.

Documentation 

When you apply for a personal loan, lenders will ask you for some documents to prove your identity and enable them to check your income and credit history. These could include: 

• Driver’s license or other government-issued ID

• Bank statements

• Pay stubs 

• Tax forms

Prepare your documents in advance before you apply for your personal loan. Many lenders make it easy to upload digital versions of documents. 

How to improve your personal loan approval odds 

A few changes in your debt management could make a big difference in improving your chances of approval for a personal loan. Here are a few quick tips and money moves to think about before you apply: 

• Reduce DTI by paying off small debts. If your DTI is close to the lender's limit, try to pay off a few smaller debts before you apply. This could reduce your DTI enough to help you qualify. 

• Boost your credit score. Disputing credit errors, paying down your credit card balances, and improving your payment history are all ways you could boost your score.

• Choose a smaller loan amount. Smaller loans could impact your DTI less and may have lower credit score requirements. Try to borrow only the money you need.

• Prequalify with a soft credit check. Many lenders will give you a chance to prequalify without impacting your credit score. This lets you focus on lenders more likely to approve your application.

• Add a co-signer or co-borrower, if allowed. If you have a friend or family member who has strong credit, you can ask them to co-sign the loan. Co-signers agree to take responsibility for the loan, so it reduces the risk for the lender and may help you get approved. Make sure you have a solid repayment plan in place before asking someone to co-sign a loan.

Real-life example: how to improve personal loan approval chances 

Alex has a 690 credit score, $1,620 in monthly debt including housing costs, and earns $4,500 before taxes each month. That makes Alex’s DTI 36%, a little too high for some lenders. Alex might get denied for a personal loan.  

One of Alex’s monthly debt payments is a $1,000 credit card balance with a $50 monthly payment. If Alex can pay off that balance and ditch the $50 payment, their DTI ratio drops to just under 35%. And Alex’s credit utilization declines by $1,000. This one simple move could increase Alex’s chance of getting approved for a personal loan. 

What credit score helps you get a personal loan (and what if yours is lower)? 

In general, the higher your credit score, the better your ability to get a personal loan. Credit score isn’t the only factor in getting approved for a personal loan, however. 

There’s also no one credit score number that guarantees personal loan approval. Instead, a range of credit scores could get you approved, depending on your overall qualifications. Your credit score has a big influence on your interest rate, too.

What credit score do you need for a personal loan approval?

Lenders generally prefer a credit score over 620 for personal loans. The exact credit score needed for personal loan approval will depend on the lender and your other qualifications.

If you have a lower credit score, you could still get a personal loan. You might have to pay a higher interest rate or other fees, apply with a co-signer, or accept a smaller loan amount. 

You could also wait to get a personal loan and improve your credit first. Try these tips to boost your credit score quickly:

• Check your credit report and dispute errors. Go to AnnualCreditReport.com for free weekly credit reports. Dispute any errors that might be hurting your credit score unfairly.

• Reduce your credit utilization. This is how much of your available credit you're using. If you can, pay down any cards that have a high balance relative to the credit limit.

• Becomes an authorized user. If you have a limited credit history, having someone with good credit add you as an authorized user could boost your credit score. 

Prequalification vs. full application 

If you want to shop around for personal loans, some lenders offer prequalification to find out which loan amounts and interest rates might be available for you. Prequalification uses a soft credit check and gives you an estimate of how much you could borrow without affecting your credit score. 

Prequalification doesn't involve a full loan application. Getting approved for a personal loan requires you to apply, provide documentation, and go through a hard credit check.

What to do if your personal loan application was denied 

If you get denied for a personal loan, you have the right to find out why. Lenders who deny your application for a personal loan due to your credit report should send you an adverse action letter explaining the reasons for denial. 

A few common reasons for denial of personal loan applications include:

• DTI is too high. If your DTI ratio is higher than 36% to 43%, you might be turned down for a personal loan.

• High credit utilization. Using a large percentage of your available credit, such as maxing out your credit cards, could result in your personal loan application being denied. 

• Credit score is too low. A credit score that’s fair or lower, combined with  other factors like high DTI could cause you to get denied. 

• Thin credit. If your credit history is thin, meaning you don’t have much credit history, you might need to establish and build your credit before you can get approved for a personal loan. 

• Recent delinquencies or defaults. Recent negative items on your credit report, like delinquent debt, collection accounts, or defaults on loans, could mean a denial. 

Once you know the reason for getting denied, you can get ready to try again. You might need to spend some time and effort to fix the issues. Try to raise your credit score, reduce debt, or improve your income before you apply again. Understanding the application process and preparing in advance could help you improve your chances of getting approved for a personal loan. 

Ready to get started? Check your rates with Achieve Personal Loans today.