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Getting a personal loan can be easy if you meet all the lender's requirements and are flexible with the interest rates you'll pay. With the range of uses for personal loans, it's no surprise that so many people choose this option. Whether starting a business, consolidating debt or tackling home improvement projects, about 25 million Americans take advantage of personal loans, according to Experian data.
While there are many factors that go into the personal loan approval process, once you understand what lenders are looking for, it may be easier than you think. Read on to find out more about personal loans and how they work.
Is It Hard to Get a Personal Loan?
Getting a personal loan can be a relatively simple process, but to qualify, lenders usually require information about your credit history, income, employment status and current debt obligations. Your income needs to be high enough to cover the loan repayment amount and your other monthly expenses. This is typically determined by your debt-to-income (DTI) ratio, which is calculated by dividing your monthly debt payments by your gross monthly income.
Other factors can impact how easy or hard it is to qualify for personal loans:
- Secured or unsecured loans: Most personal loans are unsecured, meaning they don't require collateral to guarantee the loan. Because unsecured loans are riskier for lenders, they have stricter eligibility requirements than secured loans.
- Size of the loan: Smaller loans may be easier to qualify for because you'll likely have a smaller monthly payment that may be manageable with your income and expenses.
- Income: Lenders want to know your income can support repayment on a loan. Minimum income requirements vary among lenders and loans, but you will need to show proof of income if there is a requirement.
- Credit score: Most personal loans require a minimum credit score to qualify, but that minimum varies by lender and loan.
What Credit Score Do I Need to Get a Personal Loan?
Different lenders have different minimum credit score requirements, so doing your research to find a lender whose criteria align with your financial profile is critical. Most lenders focus heavily on your credit score because it offers insights into your reliability as a borrower.
Typically the higher your credit score is, the more low-interest personal loan opportunities you'll be able to explore. If you have what is considered a good or excellent credit score—usually 670 or above—you'll be more likely to get a competitive interest rate and favorable terms on your loan.
If you have fair credit, you may still qualify for certain loans; however, interest rates will likely be higher. There are ways to get a personal loan with poor credit, but they may be costly and put your financial security at risk.
Knowing your score can help you find the type of personal loan you're most likely to qualify for.
- Unsecured personal loans: An unsecured loan isn't backed by any collateral, so borrowers with good or excellent credit are most likely to qualify for these types of loans. Borrowers with fair credit might still qualify but will likely be charged a higher interest rate, increasing the cost of the loan.
- Online lender loans: Many online lenders work with those with lower credit scores or limited credit history. Some don't place as much emphasis on credit scores as traditional banks and instead focus more on income. Other modern lenders might put more emphasis on the field you work in, your educational background or future earning potential when making a decision.
- Secured personal loans: These loans require an asset, such as property or automotive title, as collateral to help increase your odds of getting approved. Be cautious, however: If you fall behind on payments or default on the loan, the lender has the right to seize your asset as payment for debt.
How to Get a Personal Loan
Getting a personal loan can seem intimidating, but it's pretty straightforward. Once you get clear on your financial goals and what you hope to achieve from taking out a personal loan, there are a few steps you'll need to take to get ready:
- Check your credit score. One of the first steps you should take when considering a personal loan is to check your credit score to see what you're most likely to qualify for. If your score isn't where you'd like it to be, take time to improve your score before applying.
- Compare multiple lenders. Once you know your credit score, you can start shopping for personal loans. When comparing offers, read the fine print and understand all the terms and conditions of the loan before agreeing to anything. Pay close attention to the interest rate, the repayment schedule and any fees associated with the loan. With Experian CreditMatch™, you can compare personalized loan offers based on your credit profile. This allows you to compare multiple offers you're likely to qualify for one place.
- Gather all the information and documents you'll need. When you apply for a personal loan, you will typically need to provide information like your name, address, date of birth, Social Security number and employment information. You may also need to submit financial documents like tax returns, bank statements or pay stubs.
- Fill out the application. Once you've chosen a lender and decided how much you want to borrow, it's time to apply for the loan.
- Make a plan for repayment. Before taking out a personal loan, make sure you can afford the monthly payments. Personal loans typically have fixed interest rates, which means that your monthly payment won't change over the life of the loan; however, it's worth double-checking to ensure the rate isn't variable. Be sure to factor in the interest rate when calculating your monthly payment so you don't default on your loan.
The Bottom Line
Taking out a personal loan can be a great way to finance large purchases or consolidate debt, but it does require preparation. You'll need to ensure you meet the lender's requirements, have the necessary documentation and shop around to get the best deal.
And while there's no guarantee you'll get the personal loan amount you want, one of the best ways to improve the odds of getting a solid offer is to stay on top of your credit and work on improving it with a resource like Experian Boost®ø. Experian Boost gives you credit for the bills you already pay, like utilities, streaming services and rent. It also lets you access your free Experian credit report and FICO® Score☉ and includes free credit monitoring.
With some research, you can find personal loan terms that work for your unique situation and make the personal loan process easier and more affordable.