Personal loans can be used for different purposes, such as buying a car, paying for higher studies, undertaking a home improvement project, or dealing with a financial emergency. Many banks and financial institutions offer these loans, with approved amounts as high as $100,000 in some cases. That said, not everyone may qualify for a personal loan. Lenders set specific eligibility criteria, which one must meet before applying for the service.
Eligibility criteria for a personal loan
Those who need a personal loan can contact a bank to know their eligibility requirements. While the criteria may vary from one lender to another, most of them have a few common requirements.
Credit history and score
When someone applies for a personal loan at a bank or lender, they will first check the borrower’s credit score. This score can range between 300 and 850 depending on whether the individual has been diligent in repaying loans in the past and whether they already have outstanding debt. Generally, one would need a credit score of at least 600 to qualify for a personal loan. That said, a few lenders accept a lower score.
Income
Lenders impose income requirements when approving loans to ensure borrowers can repay the amount in time. The minimum income requirements for small personal loans may vary from one lender to another. Some do not disclose the minimum income requirement to interested borrowers. Instead, they decide on a case-to-case basis after looking at the documents submitted for the personal loan application. These may include pay stubs, recent tax returns, signed letters from employers, and monthly bank statements. Self-employed individuals can furnish bank deposits or tax returns.
Debt-to-income ratio
Lenders calculate the borrower’s debt-to-income (DTI) ratio to understand their ability to repay current and new debt. This ratio is expressed as a percentage and depicts how much gross monthly income one can use to clear the debt every month. A DTI below 36 percent is ideal, but some lenders will approve the personal loan application of a highly qualified borrower with a DTI of up to 50 percent.
Collateral
Lenders may sometimes demand collateral when one applies for a personal loan. If one cannot repay the loan, the lender can sell the collateral to recover their dues and avoid a loss. Collateral may be defined as any valuable asset, such as precious metals, rare collectibles, or coins. One may also be able to pledge their investments or cash accounts as collateral. When using a personal loan to buy a vehicle or home, the car or house may serve as collateral.
Besides meeting these requirements, one would need to pay some fees upfront when applying for a personal loan. For instance, lenders may charge an origination fee to cover the expenses related to processing the application, running a credit check, and closing the loan in the future. Typically, the fee ranges from 1 to 8% of the loan amount, but it can vary depending on the loan amount and the applicant’s credit score. While some lenders may demand this fee as cash upon closure, others might subtract it from the loan amount.
Documents required for a personal loan
Lenders usually request a few documents as a part of the personal loan application process.
Loan application
It is a formal document that lenders need the borrowers to fill out to initiate the lending process.
Identity proof
Lenders usually require applicants to furnish a minimum of two government-issued IDs to confirm they are a citizen and at least 18 years old. Identity proof helps lower the probability of identity theft. A birth certificate, driver’s license, military ID, certificate of citizenship, passport, or another state-issued ID are among the commonly accepted IDs.
Income and employer verification
To ensure one can repay their current debts and the new loan, lenders require one to produce documents showcasing their current earnings and employment history. Some acceptable forms for income verification include paystubs, bank statements, and W-2s and 1099s. Self-employed borrowers can submit bank statements, income tax returns, and 1099 forms. A few lenders may also accept Social Security and other forms of income.
Address proof
To ensure the borrower has a stable living situation, lenders may ask them for a copy of the rental agreement or lease, recent utility bill, or proof of home. A voter registration card and auto or rental insurance with a mention of the address may also be acceptable.
Popular small personal loan sources
Many banks and lending institutions offer small personal loans. One can compare the available options and choose the most suitable one.
Lake Michigan Credit Union
LMCU offers personal loans as small as $250. There is no origination fee, which can help keep the loan cost low. Further, they offer loans with competitive APRs. To qualify, one’s credit score should not be lower than 620. One should also be a citizen with an immediate family member who is an LMCU member. There are other requirements also that one must meet.
Patelco Credit Union
This credit union is known to offer flexibility. One can apply for loans with tenures from 6 months to 7 years and amounts between $300 and $100,000. To qualify, one must be a Patelco member, hold a minimum credit score of 640, and have a Social Security number.