Content of the material
- 1. Check your credit
- 3. Compare loan offers
- Things to consider
- Typical Personal Loan Documents
- Loan Application
- Proof of Identity
- Employer and Income Verification
- Proof of Address
- Know Your Rights Under Regulation Z
- What Are the Different Types of Personal Loans?
- Can I prequalify for a personal loan?
- 2. Income
- What Else Do I Need to Get a Personal Loan?
- Where can I find the best personal loan rates?
- Learn more:
1. Check your credit
Before starting the application process for any kind of loan, it’s a good idea to review your credit.
Credit history and credit scores are among the financial factors lenders will generally consider when reviewing your loan application. Your credit history can affect whether a lender will approve you for a loan and the interest rate it offers you. Good credit can typically make it easier to get a loan and a favorable interest rate.
You can use the Credit Karma app to check your Equifax® and TransUnion® credit reports for free. You’ll need to sign up for an account to use the app and get your credit scores, but it’s always free to join.
Lenders may also consider your debt-to-income-ratio when considering you for a loan — which is the total of all the debt payments you must make each month divided by your gross monthly income. This ratio helps lenders understand how well you’ll be able to manage repayment if they give you a personal loan.
3. Compare loan offers
Once you submit your information, you may receive some information if you prequalify, such as …
- Loan amount you may qualify for
- Estimated monthly payment amount
- Estimated interest and fees
- Estimated annual percentage rate, or APR
- Loan term
Again, it’s important to remember that these are potential offers and tentative rates and terms. You’ll get definitive information about the loan a lender’s willing to offer you only after you formally apply directly with the lender.
Things to consider
When you’re reviewing your loan options, be sure to compare …
- APR — This is how much it will cost you to borrow money, including the interest rate and any potential fees. Learn more about APR and why it’s important.
- Loan term — Generally, loans with a longer term have a lower monthly payment. But they could cost more in interest in the long run.
- Origination fee — Some lenders charge this fee for making a loan.
All of these factors can affect the total cost of your personal loan.
Typical Personal Loan Documents
When it’s time to formally apply for a personal loan, your lender will request a number of documents to confirm everything from your identity to your residence and employment. Here are the most common documents lenders require as part of the personal loan application process.
A loan application is a formal document that lenders require prospective borrowers to complete and submit to begin the lending process. Each lender has its own application, so the specific requirements may vary. In general, though, you’ll need to provide basic personal information, how much you want to borrow and the purpose of the loan.
The format of a loan application may also vary by lender. While there are numerous online lenders that offer a completely online application experience, others may need to discuss your application over the phone before providing a decision. There are also a number of brick and mortar banks and financial institutions that require applicants to submit a paper application in-person.
Proof of Identity
Most lenders require applicants to provide at least two forms of government-issued identification to prove they are at least 18 years old and a United States citizen. This precaution also reduces the threat of identity theft. Acceptable forms of government-issued identification often include:
- Driver’s license
- Other state-issued ID
- Certificate of citizenship
- Birth certificate
- Military ID
Employer and Income Verification
A lender wants to see that you have the ability to pay back your current debts as well as the new loan. To do this, lenders typically require prospective borrowers to demonstrate their employment history and current earnings as part of the application process. Common forms of income verification for traditional employment include:
- W-2s and 1099s
- Bank statements
- Employer contact information
Prospective borrowers who are self-employed must instead rely on bank statements, 1099 forms and income tax returns.
Proof of Address
In addition to confirming your employment, most lenders want to know that you have a stable living situation. This may involve providing proof of your address, including a recent utility bill, a copy of your lease or other rental agreement, voter registration card or proof of home, rental or auto insurance that lists your address.
Know Your Rights Under Regulation Z
In 1968 the Federal Reserve Board (FRB) implemented Regulation Z which, in turn, created the Truth in Lending Act (TILA), designed to protect consumers when making financial transactions. Personal loans are part of that protection. This regulation is now under the auspices of the Consumer Financial Protection Bureau (CFPB).
Subpart C–Sections 1026.17 and 1026.18 of the TILA require lenders to disclose the APR, finance charge, amount financed, and total of payments when it comes to closed-end personal loans. Other required disclosures include the number of payments, monthly payment amount, late fees, and whether there is a penalty for paying the loan off early.
What Are the Different Types of Personal Loans?
The different types of personal loans are:
- Debt-consolidation loan: rolls multiple debts into one new loan
- Co-signer loan: a loan you need a co-signer to qualify for
- Secured and unsecured loans (unsecured are more common)
- Fixed and variable rate loans (fixed are more common)
Can I prequalify for a personal loan?
If you want to know what your loan rates and terms may be ahead of the formal application, look for lenders that have a prequalification process. Prequalifying is a no-commitment option and will only use a soft credit inquiry, meaning your credit score won’t be impacted.
To see if you prequalify, you’ll need to answer a basic questionnaire with some personal information. Details may include your name, address, and Social Security number, your annual gross income, the loan amount you need and your reason for seeking a loan.
Depending on the lender, a prequalification form might ask other preliminary questions. During this stage, you won’t be asked for additional documentation; the lender will ask for any required supporting documents after you’ve decided to move forward with an offer.
Lenders impose income requirements on borrowers to ensure they have the means to repay a new loan. Minimum income requirements vary by lender. For example, SoFi imposes a minimum salary requirement of $45,000 per year; Avant’s annual income minimum requirement is just $20,000. Don’t be surprised, however, if your lender doesn’t disclose minimum income requirements. Many don’t.
Evidence of income may include recent tax returns, monthly bank statements, pay stubs and signed letters from employers; self-employed applicants can provide tax returns or bank deposits.
What Else Do I Need to Get a Personal Loan?
Almost all personal loan lenders will ask for certain types of information, including:
- Social Security number
- Bank information
- Mailing address
- Proof of income
- Government-issued photo ID
- Documentation such as recurring monthly expenses and other debt payments
Lending institutions may also look at your debt-to-income ratio, or DTI, to determine whether you’ll likely be able to afford your payments. This number looks at the total income you earn compared with the total amount you owe each month. The higher your DTI, the more a lender may doubt your ability to take on additional loans because you’re already carrying a lot of debt.
Here’s how to calculate your DTI:
- Determine your monthly gross income—the total amount you earn before taxes and withholdings
- Add up your total monthly debt payments—including auto loan, mortgage and credit card payments
- Divide your total monthly debt by your entire gross income
For example, if your gross monthly income is $5,000 and your total debt each month is $1,500, your DTI would be 30%.
Lenders will use all of the above information alongside your credit score to assess whether to approve you for a personal loan.
Where can I find the best personal loan rates?
Now that you have a better understanding of how to get a personal loan, it’s important to compare a handful of offers to see which lender can give you the lowest interest rates and fees. This will help you find a loan that meets your needs and is most affordable in the long run. You can also sign up for a Bankrate account to get prequalified for a personal loan in under two minutes.
- What documentation is required for personal loans?
- The pros and cons of personal loans
- Where to get a personal loan