If you need some extra cash, a personal loan might be a huge help. Getting a personal loan isn’t necessarily complicated, but doing it the right way can improve your chances of approval and help you lock down a good interest rate. With this article, we’ll answer your question, “Am I eligible for a personal loan?” and provide a few tips to start the process.
What Is a Personal Loan?
A personal loan often ranges from $1,000 to $50,000. One of the most appealing things about this type of debt is that you can use the money for almost anything. Borrowers commonly spend it on:
- Auto repairs
- Unexpected medical expenses
- Insurance deductibles
- High-interest loans
- Small business startup costs
There are many places to get a personal loan, including online financial institutions, credit unions, and the bank where you have your checking and savings accounts. Each organization has its own eligibility criteria, and you’ll need to submit an application to see if you qualify.
Most lenders look at a few common factors, like your credit score, to determine if lending you the money is a sound risk. Personal loans are also typically “unsecured.” This means you don’t need to put up any collateral, like your car or a home, to get funding. You’re also likely to get a fixed interest rate, so your monthly payment will stay the same for the entire term.
Know Your Credit Score
Once you understand what these loans are, you might start to ask yourself, “Am I eligible for a personal loan?” That answer starts with your credit score. Running your credit is one of the first things every lender will do. While it depends largely on the institution, the minimum credit score you’ll need to get a personal loan is typically in the early 600s. While scores range from 300 to 850, the higher this figure, the better your chances of approval. A good credit score can also help you get more competitive interest rates and longer terms.
If you have a fair credit score — or no credit history at all — you may find getting approved for a personal loan challenging. Some lenders do have low credit score eligibility requirements. However, those institutions may weigh other factors more heavily, such as your employment history, and will likely charge you a higher interest rate to protect themselves from a risky borrower.
Enlisting the help of a co-signer may improve your odds of securing a personal loan. This person is usually someone close to you, like a parent, who is willing to guarantee repayment of the debt if you end up defaulting. You can also take steps to improve your credit score, including:
- Disputing any errors
- Negotiating with creditors
- Paying off old balances
- Building your credit file with a new account
- Paying down revolving balances
Understand Debt-to-Income Ratio
You can improve your approval odds with a low debt-to-income ratio (DTI). This number is the percentage of your gross monthly income that you use to pay your debts, like credit card bills, house payments, and car loans. Many lenders consider your debt-to-income ratio alongside credit history to see if you’re eligible for a personal loan, as well as other lines of credit.
To calculate your debt-to-income ratio, add up all of your monthly bills and divide that number by your income before taxes, then multiply that number by 100 to find your percentage. For example, if you spend $1,000 a month on debt and your gross monthly income is $5,000, your DTI ratio is 20%.
When calculating your DTI, factor in all earning sources, including any part-time jobs, and don’t include expenses like insurance, utilities, and taxes. Aim for a debt-to-income ratio of 36% or less. Lenders use your DTI to determine if you’re a reasonable risk, so if you have a ratio of 44% or higher, you may get denied for having too much debt.
There are only two ways to improve your DIT ratio: pay down your credit balances or increase your income. Avoid short-term strategies that lower your percentage, like asking for a limit increase on your credit cards or requesting a forbearance on your student loans. These solutions tempt you to spend more in the long run and delay repayment of your current obligations.
Even if you’re not quite ready to submit your personal loan application, knowing your debt-to-income ratio is a terrific way to calculate your debt levels. By monitoring your overall financial health, you’ll know whether or not you should apply for more credit — and when.
Keep an Eye on Your Credit Utilization Ratio
Whether you’re eligible for a personal loan can also depend on your credit utilization ratio. This figure represents how much credit you have and how much you’re using. Ideally, your score should be 30% at most. For example, if you have a $10,000 limit on your credit card, aim to keep the balance under $3,000.
Know Your Other Eligibility Requirements
Lenders may impose other eligibility requirements for a personal loan, like income requirements. Institutions want to ensure you have the financial means to repay your bills. You may have to provide pay stubs, tax returns, or your bank statements as evidence. Your employment history may also come up in some cases, as well as your age. You must be at least 18 years old, or the legal age required in your state, to get a personal loan.
Next Steps To Get a Personal Loan
Before you apply, make sure that a personal loan is the right choice for your financial future. Only ask for as much money as you genuinely need, and submit your application to at least three institutions so you can pick the best deal for you.
If your lenders decide that you meet the minimum eligibility requirements for a personal loan, ask for a list of specifics, and don’t overlook your bank’s fine print. Remember to ask about other costs, like application fees, so you’ll know which option offers the best overall product. Compare each bank’s offer side by side, including factors like:
- Annual percentage rate
- Length of term
- Minimum monthly payments
- Prepayment penalties
- Late fees
Understanding if you’re eligible for a personal loan can help maximize your chances of approval. Use our handy guide to navigate the process so you can get started today.
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