A personal loan can help you purchase or pay for something specific now and repay the lender in installments over time. You can use a loan to cover unexpected expenses, such as medical bills, or for pricey projects like home renovations. Similarly, a loan can help you consolidate your existing debt so you only have one payment.
A loan differs from a credit card in that personal loans do not have open and revolving credit. However, lenders will look at your credit score and financial history before making an approval decision on your loan application. If you are thinking about applying for a loan, then it is important to be aware of the qualifications.
A personal loan is a fixed amount that you, the borrower, repays to the lender over a determined period, plus interest charges. Payments are typically monthly, and the loan duration can range from a few months to several years. You may apply for:
What to Know Before Applying for a Personal Loan
- A secure loan, which is collaterally backed by approved proof of funds, such as a savings account, or valuable property. In the event that you miss loan payments, then the lender may collect the collateral as compensation for the loan. You may only qualify for a secured loan if you have a bad score and a poor history of debt repayment.
- An unsecured loan, which is not backed by collateral. You may meet the credit requirements for an unsecured loan if you have a better than fair financial history.
Other fees to be aware of include those for paying back the loan too quickly. Since lenders’ profits come from interest payments, they may charge prepayment penalties for closing your account early and, therefore, reducing interest earnings.
Credit Score Requirements for a LoanGenerally speaking, the better your credit score, the more likely lenders will approve you for a loan. Most lenders break financial scores into the following ranges:
- A score between 720 and 850 is considered Excellent
- A score between 690 and 719 is considered Good
- A score between 630 and 689 is considered Fair
- A score between 300 and 629 is considered Bad
However, if you have a fair credit score, then lenders may look further into your financial history to make an approval determination. Lenders will review any negative mark, like late payments and bankruptcies, to assess your risk. Having too much debt is a red flag to lenders, so you should reduce your existing debt as much as possible before applying for more.
The credit requirements for unsecured loans are usually 660 or higher, however, each lender has its own specific criteria. You may have to consider a secured loan if you have bad or poor credit. Likewise, lenders may only approve your application if certain conditions are met.
Other Loan QualificationsWhen you apply for a personal loan, the lender will need to see your personal information. To check your score and verify you meet the credit requirements, the lender will need your full name, Social Security Number and date of birth.
They may also need proof of income through bank statements or pay stubs to show evidence that you can pay back the loan. Depending on the state in which you live, you may also need to furnish your address.
The loan qualification may vary depending on how much you are requesting. For instance, you may have the score to qualify for a lower interest rate but only for a loan with a capped amount based on your earnings and existing financial responsibilities. To qualify for the loan amount with a preferred rate, you may need to first pay off existing debts, increase your income or improve your financial history.