Personal loan requirements and eligibility

A great way to boost your financial confidence is to learn exactly how financial products work. Applying for a personal loan should be a lot less intimidating when you're certain you know what to expect from start to finish.

That's not all, though. The more you know about how personal loans work, the better prepared you could be to shop around, find favorable terms, and even improve your ability to get approved for a loan.

One good place to start is with learning what it takes to get a personal loan in the first place. Let's explore the basic requirements to apply, what lenders generally look at for approval, and how to make yourself the best applicant you can be.

Key personal loan eligibility factors

You'll need to meet some very basic requirements to apply for a personal loan from pretty much any lender in the U.S. In addition, every lender will have its own specific criteria it uses to approve (or reject) personal loans applications.

What are the basic requirements for a personal loan?

At a minimum, you'll generally need these to apply for a personal loan:

• Be at least 18 years or older

• Have proof of U.S. residency

• Have an active bank account

Some lenders might approve non-U.S. residents, but that's rare. A bank account is normally required so the lender has somewhere to deposit your funds, as most lenders do this via a direct transfer.

What are the eligibility criteria for a personal loan?

Beyond the basic requirements, you'll also need to satisfy eligibility criteria set by the lender to be approved for a personal loan. The specifics will vary a lot by lender and loan, but typically cover:

• Credit score. Most lenders prefer a minimum FICO credit score of 580 to 660 for approval, and a score of 720 or higher for more favorable rates—though each lender sets its own thresholds.

• Income. How much income you need depends on the size of loan you want. Lenders may ask for proof of income, such as a W-2 or tax return.

• Debt-to-income ratio. To figure out if you can afford a loan, lenders look at your debt-to-income (DTI) ratio, which is your monthly debt payments (including housing costs) divided by your monthly pre-tax income. Say you earn $5,000 per month, pay $1,200 for rent, and have $600 in monthly debt payments. Your total monthly obligations are $1,800. Divide $1,800 by $5,000, and your DTI is 36%. This means 36% of your income goes toward debt and housing costs.

• Employment history. Lenders want to know you can afford your debt for the full length of the loan. A history of stable employment (or stable income if you're self-employed) could help your application.

Required documents for a personal loan

Personal loans come with a certain amount of paperwork. You'll need to fill some out and provide some of your own. Here are the documents you may need to get a personal loan:

• Government-issued ID (a driver's license, state ID, or passport)

• Social Security number

• Proof of income (paystubs, W‑2s, tax returns, or bank statements)

• Employer contact information

• Proof of address (such as a utility bill or lease agreement)

• Bank account and routing number for receiving your funds if approved

What determines if you get approved for a personal loan?

There’s no one single thing that determines your eligibility for a personal loan. Lenders will look at all of your qualifications to decide on your application.

And that's a good thing! It means that you could still be approved even if you're weaker in one area as long as you're stronger in another.

For instance, lenders will look at both your credit history and your DTI. If you happen to have a lower credit score but your DTI is in great shape, you could still get approved. Similarly, if your DTI is a little on the high side but your credit is excellent, the lender may be more willing to approve your application.

That's one of the reasons lenders will work to verify all of your information. Proving a strong income and work history could help offset a weaker credit score—or vice versa.

Common reasons personal loan applications are denied

Not every loan application gets approved. Here's why an application could be denied:

• Your DTI is too high. Most lenders like a DTI below 36%, though a strong credit score could still help you get approved with a higher DTI.

• You asked for too much money. If the loan you ask for is too large, it'll make your DTI too high and you could get denied.

• Your credit score is too low. Generally, the higher your credit score, the better your chances of being approved. A low credit score is a fairly common denial reason.

• The lender couldn't verify your income or employment. Lenders normally won't approve a loan without verifying that you can make the payments.

• The lender couldn't verify your identity. Federal law requires that lenders verify your identity to meet Know Your Customer (KYC) requirements.

• You have recent delinquencies or a bankruptcy on your credit report. A single late payment may not immediately disqualify you, but a major negative item on your report—especially a very recent one—could get your application denied.

• You have too many recent credit inquiries. Each time you apply for credit, a hard inquiry is marked on your credit report. If you have a lot of recent inquiries, lenders could think you're trying to take on too much debt at once.

How to improve your personal loan eligibility

You have more power over your approval than you might think. Try these tips for improving your eligibility:

• Lower your DTI. If your DTI is on the cusp of being too high, getting it down even a couple of points could go a long way. Paying down your credit card balances could help.

• Improve your credit score. A few more months of on-time debt payments or reducing your card balances could give your score the boost it needs.

• Double-check your documents. Avoid delays by making sure all your T's are crossed and I's are dotted so the lender can verify everything quickly.

• Request only the amount you need. A smaller loan could impact your DTI less, making it easier to get approved.

• Add a co-signer to your application. If your credit is a problem, a co-signer with good credit could make all the difference. Make sure you have a solid plan for repayment, however, as your co-signer will be on the hook both legally and financially.

• Prequalify before you apply. Most lenders let you prequalify with a soft inquiry. Prequalification gives you estimated rates and terms so you can compare options before you submit a full application. A soft inquiry doesn’t affect your credit score.

Personal loan lenders look at the complete picture when evaluating your application. Anything you can do to look like a more reliable borrower could help you get approved.