Taking the first step into exploring personal loans can feel like a daunting journey. But understanding the requirements and qualifications for personal loans can help you prepare and increase the chances of getting approved. Here are 5 requirements you should prepare before applying:
- Credit Score
- Income & Employment
- Debt-to-Income Ratio
- Secured or Unsecured Loan
- Proof of Bank Account & Permanent Address
We want to demystify the process so you know what you’re looking for, and when you’re ready to apply, you can do it with confidence.
What Is a Personal Loan?
Life can be unpredictable, and we all have had experiences where money becomes a nagging issue. Whether it’s paying off unexpected bills or getting a new car, it can be challenging to keep up with all the expenses. Personal loans may be a helpful solution during such times.
A personal loan is a fixed amount of money borrowed from a lender with a set interest rate and a specified repayment period. Unlike other loans that have a specific purpose like mortgages and auto loans, personal loans can be used for almost any purpose, including home renovations, large purchases, or even debt consolidation.
However, the interest rate and repayment period may vary based on your reasons for borrowing.
1. Credit Score
One of the most critical factors determining your personal loan eligibility is your credit score and history. A credit score shows your creditworthiness and your ability to repay debt. Your credit score is determined by many factors, including your payment history, credit card balance, length of credit history, and more.
Personal loans, like any other loan, typically require a minimum credit score to qualify. In most cases, lenders prefer scores of 660 and above as they’re seen as lower risk. If your credit score is low, you may not be approved for a personal loan, or you may need to pay a higher interest rate.
Even a slight difference in your interest rate can mean significant savings over time. For example, if you have a $10,000 loan with a 6% interest rate, you’ll pay $1,315 in interest over 3 years. However, if you have the same loan with a 9% interest rate, you’ll pay $1,953 in interest—$638 more.
Credit score isn’t the only factor when being approved for a personal loan, but it is taken into account and is worth remembering.
2. Income & Employment
Lenders need evidence that you can repay the loan amount you are requesting. One way to show this is by providing proof of steady, verifiable income. If you’re unemployed or have a minimal income, the lender may not approve your loan, as they cannot be sure of your repayment capacity.
This can be for your protection as much as for the lenders, as borrowing outside your ability to repay is a quick way into substantial debt. Lenders may ask for you to be at your current employer for a certain amount of time.
For example, at Blue Copper Capital, we request that you’ve been with your employer for at least 90 days. A stable employment record helps prove that you have a consistent source of income, minimizing the risk of loan default. You’ll usually be asked to provide pay stubs to verify your income.
3. Debt-To-Income Ratio
Your debt-to-income (DTI) ratio is a measure of how much debt you have compared to your income. Lenders use DTI to determine whether you can afford to repay a personal loan.
It helps measure the percentage of your earnings that goes toward paying off debt, including credit cards, car loans, mortgages, and personal loans. To calculate DTI, you need to divide your monthly debt payments by your gross monthly income, then multiply by 100 to get a percentage.
For example, if your monthly income is $5000, and your monthly debt payments are $1500, your DTI would be 30%. To write that out: $1500 ÷ $5000 x 100 = 30%.
Lenders use DTI to determine whether you can afford to repay the loan or not. A high DTI indicates that you have a heavy debt burden and may not be able to meet the monthly loan payments. Lenders have a responsibility to ensure that the borrower can repay the loan without defaulting. Hence, a high DTI reduces your chances of getting approved for a personal loan or any other form of credit.
4. Secured or Unsecured Loan
Lenders can offer personal loans as unsecured or secured loans. A secured loan is backed by an asset such as a car or a house, which serves as security for the loan. If you default, you stand to lose the collateral.
An unsecured loan is not backed by any collateral. Such loans are offered solely based on your creditworthiness and financial history. Interest rates for unsecured loans may be higher since there’s no asset to mitigate the lender’s risk.
Since unsecured loans do not have collateral to reduce the lender’s risk, there may be stricter eligibility criteria. These often include a strong credit history, high income, and stable employment. However, for secured loans, the eligibility criteria depend on the value of the collateral you’re putting up.
5. Proof of Bank Account & Permanent Address
One of the primary reasons lenders require proof of a bank account and permanent address is for identification purposes. Financial institutions need to verify that you are who you say you are, and that you reside in the location you claim to live in. These details are vital for the lender to trust you as a reliable borrower.
Straightforward Loans for Everyday People
Personal loan applications can feel intimidating, but they don’t have to be. At Blue Copper Capital, we believe in ethical lending and honest relationships—and that starts with you feeling confident in the process. Contact us if you have any questions or apply for your loan today!
