A personal loan could be a great way to consolidate debt or fund a purchase you’ve been dreaming about for years, and it’s very common to wonder how to get one. Many factors might come into play when applying for a loan. Credit score, employment history, current debt and income all could be approval factors. If that sounds intimidating, never fear because we kind of know a thing or two about loans and are here to answer all your questions.

The most common questions center around:

  • Personal loan eligibility requirements.
  • What is needed to apply for a personal loan.
  • How long it takes to get a personal loan.
  • What to do next if you’re approved or denied.

What Are the Eligibility Requirements to Get a Personal Loan?

While some of us wish it was possible to walk into a bank, ask for $20,000 and walk out, we also acknowledge that such a method can only be done in a way that involves the FBI. That’s ok; it’s easy to apply online and not even walk into a lobby.

You do need to meet requirements set by the lender to be approved for a personal loan. Whereas business loans or home loans might take weeks or months, a personal loan is typically actioned with more immediacy, based on these few requirements.

Good or Excellent Credit

Whether we like it or not, three silly numbers significantly impact our lives. Your credit score could affect renting an apartment or your car insurance rates, but its primary function is for lenders to decide if they should lend money to borrowers. Your loan application will require a hard credit check, meaning the check will show on your credit report. The lender will use their copy of the report and that three-digit FICO score to determine your eligibility. According to credit.org, a good credit score is considered to be 680-739 and an excellent credit score would be 740-850.

Low Debt-to-Income Ratio

A borrower may be making all of their loan payments on time, but if they have a lot of debt compared to their income, the risk associated with lending to them increases. The U.S. Consumer Financial Protection Bureau defines 43% as a critical debt-to-income ratio benchmark because it is the general cutoff for qualifying for a home loan. A debt-to-income ratio below 30% is often considered optimal by lenders. To calculate your ratio, add up your monthly loan payments and divide them by your gross monthly income.

On-time Payments

Your credit report breaks out each creditor and your monthly payment history. If there have been payments over 30 days late, the creditors will have reported them to the credit bureaus, and lenders view missed payments as warning signs that could mean a borrower is having difficulty paying debts. Getting a loan could be difficult if you are currently behind with any creditors.

If you didn’t have a use for it before, that calendar on your smartphone is awesome for delivering the news that your payment is due. In order to make the reminder super annoying, have your phone’s personal assistant set to read those off to you.

Other Factors That Impact a Personal Loan Application

Employment

Lenders might ask for paystubs or other proof of income to ensure that you are employed. Additionally, they could have you state your time in your current job and possibly how long you’ve been in your field of industry.

Income

Income is used to calculate your debt-to-income ratio, but it is also a general guide to loan affordability. A loan amount too high for a certain income level may not be approved. The bank might consider that you have other non-debt obligations like general cost-of-living expenses and the 50 totally unknown monthly subscription services we all seem to have. Have you realized it’s not possible to watch all those streaming shows yet?

Amount of the Loan

Weighted against your income, current monthly payments, and current debt-to-income ratio, the lender will calculate the debt-to-income ratio and total monthly loan payments to determine the likelihood of loan default. Flattery of a loan officer is quite ineffective in this situation, especially if you’ve applied online.

Type of Loan

The bank might consider loans for debt consolidation or secured auto loans differently due to credit risk. When your debt is consolidated into an unsecured loan, the debt-to-income ratio stays the same, and your monthly payments might or might not be reduced. Still, this loan has higher risk for a bank, which means higher interest rates, because there is no real property securing the loan.

A secured auto loan is a new loan that increases your overall debt but gives the lender some reassurance that there is an item of some value securing the loan until it is paid in full. Due to the reduced risk, this type of loan could have a lower interest rate.

Co-signer

In cases where there might be some qualifications you don’t meet, or if your credit isn’t quite where you’d like it, a co-signer with excellent credit may help you qualify for a personal loan. If your cousin once said they owe you big time, this is a great time to take them up on that. Adding a co-signer to your personal loan application means that the co-signer is saying they will also be responsible for making loan payments if you fail to do so.

If your credit score is close to the lender’s threshold, interest rates could be higher as a way for the lender to offset the risk. The best way to think about interest is that it represents the risk an institution thinks the transaction carries and prices into the loan – institutions charge more as risk increases.

The lender might offer a lower loan amount and a shorter loan term if your qualifying factors aren’t as strong as they would ideally like to see. The payment amount could be higher or lower with a counter offer.

What Is Needed to Apply for a Personal Loan?

Generally, applying for a loan is quite simple and shouldn’t take long. First, identify who you want to apply with after doing your research. Lenders often offer specific rates and terms, so shop for your best fit. Also, if you have received notice of a prequalification, those could sometimes be your best offers and should have good chances of approval.

A loan application results in a hard hit to your credit report, which means your credit was checked while actively applying for credit. A hard hit could negatively impact your report, but one or two hard inquiries during the course of applying for a loan could have a negligible effect. After you’ve shopped lenders and found who you like, the loan application is often straightforward and quick. Typically applied for online, the application doesn’t take long, asks some pretty basic questions, and approval could come quickly.

Supporting Documentation You May Need for a Personal Loan

Sometimes supporting documentation is needed to secure your personal loan. If walking into a brick-and-mortar bank, it is best to take it with you. Some lenders may request information when applying online, which can be easily uploaded. That information could include:

  • Your Social Security number and card copy.
  • Pay stubs.
  • A government-issued ID.

Some lenders might ask for more information, like several months of bank statements. In the pre-internet days, finding your bank statements never went well unless it was your grandma, because she filed everything.

How Long Does It Take to Get a Personal Loan?

Once you have successfully completed the loan application process, the process to receive your funds typically takes 24-48 hours. However, for some lenders, the process may take up to two weeks.

My Personal Loan Was Approved. What’s Next?

Congratulations! You will sign documentation promising to repay the loan now that you’re approved. These documents will spell out things like payment terms, payment amounts, payment dates, and possible actions in the case of default.

Once you’ve signed the loan, either physically or digitally, expect to see the funds deposited into your account within several business days.

My Personal Loan Was Denied. What Do I Do Now?

A denial isn’t the end of the road. The lender will send you an email or document outlining the reason for their decision. One option may be getting your unfunny cousin Ray who has great credit to cosign and help you get approved. Absent a co-signer, raising your credit score may help you qualify in the future.

Raising your credit score might be as simple as paying down a credit card or correcting errors on your credit report. Here are some suggestions that may help you qualify for that loan.

Find Credit Report Errors

The U.S. government has mandated that you’re entitled to a free annual credit report from the website, AnnualCreditReport.com. Check it for errors and file a dispute with the credit bureaus if you find them.

Pay Off Some Debt

Even paying off one card might make a big difference in your debt-to-income ratio and credit utilization rate.

Improve Your On-time Payment History

If you’ve missed a couple of payments, take some time and grow your positive payment history. Your credit score will improve with every on-time payment you make going forward. Use that smartphone calendar and the most annoying digital personal assistant you have to never miss a payment.