Personal loans are a popular option to finance large purchases, such as a car, a vacation, or a home remodel. However, they also come with a number of risks, and it’s important to think carefully about the reasons you want to borrow money.
Taking out a loan can hurt your credit, especially if you default on it. It’s also best to use a personal loan only when there is a good chance it will pay off in the long run, such as making an essential purchase or consolidating debt.
Interest rates are a major factor in whether you can afford to take out a personal loan and pay it back. The interest rate you receive depends on several factors, including your credit score and debt-to-income ratio.
Because most personal loans are unsecured, they come with higher interest rates than secured loans (like mortgages or auto loans). Lenders make up this risk by charging you more to borrow money.
If you’re looking for a personal loan, be sure to compare interest rates from at least three different lenders before you choose one. That way, you can see which lender offers the best rate for your needs.
Whether you need a personal loan to cover an emergency, consolidate high-interest debt or pursue other financial goals, a good understanding of the minimum requirements can help you choose the right lender. The key is to shop around and find a lender that will offer you the best rates, terms and overall experience.
Credit Scores: Your credit scores are one of the most important factors lenders consider when evaluating your application. Having a credit score of at least 580 will increase your chances of approval, although it doesn’t guarantee a loan with favorable terms.
Employment History & Income: Lenders typically require proof of steady employment to confirm that you have the means to make your payments and meet other obligations. A job with a stable employer can also mean more certainty in your income, which helps you get approved for a personal loan faster.
The loan application process is often a lengthy one, so it’s important to understand your lender’s expectations upfront and submit your documents accurately. Getting your paperwork right can make the entire process much more efficient and smooth.
Requirements for income
When applying for a personal loan, lenders want to be sure that you have the income to repay the new debt. Minimum requirements vary by lender, with SoFi requiring $45,000 in annual income and Avant asking for $20,000.
Some lenders don’t require a specific amount of annual income but still want to verify that you have enough income or assets to cover the loan payments. They’ll ask for evidence of that income, such as pay stubs or W-2 forms.
Another important requirement is your debt-to-income ratio, which compares your gross monthly income to the minimum payments on all of your existing credit cards and other debt. The lower your DTI, the more desirable you’re to most lenders.
There are a wide variety of lenders who offer personal loans. These include traditional banks, credit unions and online lending platforms that offer flexible loan amounts and repayment terms with low interest rates and fees.
Lenders typically run a credit check before they approve your loan. This will give you an idea of what interest rate you can expect to pay and how likely you are to qualify for the loan.
You can borrow as little as a few thousand dollars to as much as $100,000, depending on the lender. Many people take out personal loans to cover large, unexpected expenses.
Personal loans can also be used to consolidate debt, such as high-interest credit card debt. This can help you save money on interest payments and pay down your debt faster.