A personal loan can be a great resource to help you achieve your financial goals, from paying off high-interest debt to going on a dream vacation. As a savvy borrower, however, you probably have a few questions first. What are the personal loan criteria for eligibility? What’s the application process? How does repayment work? When you’re informed, you can make the best decisions for your financial well-being.
Read on for the answers to these and other commonly asked questions about personal loans.
1. What Is a Personal Loan?
When you’re approved for a personal loan, you receive the funds as a lump sum. The loans are typically unsecured, meaning no collateral is required, unlike a mortgage or an auto loan. Personal loans also usually have fixed rates, making monthly payments predictable and convenient.
The funds from a personal loan can be used however the borrower would like, with a few exceptions. This can include for weddings, home remodels, medical expenses, vacations, emergencies, debt consolidation, and so on. While the money doesn’t have to be spent all in one place, many borrowers opt to put the funds toward a single major expense.
2. What Are the Criteria for Receiving a Personal Loan?
Specific requirements vary depending on the lender, but there are some general personal loan criteria you should meet to qualify. These include:
- Age: You must be at least 18 years old to apply for a personal loan.
- Credit score and credit history: Your credit score and credit history help financial institutions determine if you are a risky borrower. This, in turn, impacts your interest rate. In simplest terms, the higher your credit score, the lower your risk of default, and the lower your interest rate will be. You’ll also be eligible for a higher loan amount if your risk is lower.
Financial institutions usually prefer a credit score of 620 or higher. If your credit score is lower than you’d like, you may want to take steps to improve it before applying for a personal loan.
- Income history: Other personal loan criteria include your work history. You’ll need to have been employed for at least two years. You should have worked for your current employer for at least one year. There may be a minimum income requirement as well, though the exact number may vary per lender.
- Debt-to-income ratio (or DTI): This number shows the lender how much of your current income is being used to pay off existing debts. A DTI of 36 percent or lower is ideal. But some lenders may accept higher.
3. How Do I Apply for a Personal Loan?
You can apply for a personal loan online or by visiting your financial institution in person. The application process is usually straightforward and quick.
As you complete an application, you’ll include the amount you want to borrow and your preferred loan term. Usually, a personal loan can be for $500 to $25,000. The term is the amount of time you are given to repay the loan. That can also vary based on the financial institution, though a common loan term is 36 months.
When you apply, you’ll need certain documents. These include:
- Identification, such as a driver’s license, passport, birth certificate, or another form of government-issued ID. You’ll also be asked to provide your Social Security number.
- Proof of physical address, such as recent utility bills or a copy of your lease agreement.
- Documents that verify you are employed and employment history.
- Proof of income, such as bank statements, tax returns, W-2s, or pay stubs.
- Your checking and savings account and routing numbers.
Some financial institutions may include an application and/or origination fee. Others don’t charge any fees to apply and receive a personal loan. You should also confirm whether potential lenders charge a prepayment penalty or a fee if you pay your loan off early.
A financial institution’s website will also have helpful tools for your application, including a loan calculator that helps you estimate your monthly personal loan payment.
4. How Do I Pay Off the Personal Loan?
The amount you will owe per month depends on the total loan amount, the loan term (typically 12 to 60 months), and current interest rates. You should know the APR (annual percentage rate) before applying for a personal loan. Rates can vary by lender, so comparison shop ahead of time.
Personal loans typically have fixed interest rates, so your monthly payment will stay consistent for the life of the loan. If you fall behind on payments, however, you may incur late fees. You can make payments online, through a mobile app, over the phone, or in person, depending on the lender. You can also pay more than the set amount per month to pay off the loan ahead of time or set up automatic payments so that you don’t miss a month.
5. How Long Does It Take to Get a Personal Loan?
This is a very common question, especially for borrowers who intend to use a personal loan for time-sensitive emergencies.
As long as your application is complete and you include all the necessary information and meet the personal loan criteria, you’ll typically get a decision the same day you apply. And if you do qualify for a personal loan, it usually doesn’t take long to receive the funds. In fact, you will typically receive your personal loan funds in just one business day.You don’t have to wait to start reaching your financial goals. A personal loan may be just the asset you need to take the next steps. If you’re ready to apply, or if you have more questions, speak with a lender, and begin your journey to financial success.
