A Beginner's Guide to Applying for a Personal Loan

How to Get a Personal Loan: Requirements, Pros & Cons

A Personal loan is an amount that covers a number of personal expenses. You can borrow money as a personal loan for different reasons. You can use it to manage your debts, repair and renovate your home, for a special wedding, to make a big purchase, or even to buy a car. 

A personal loan doesn’t specify why you want it; therefore, it often comes with high interest and sometimes extra fees. 

Key TakeWays

  1. Personal loans can be used for various reasons.
  2. Banks, credit unions, online lenders, etc, provide personal loans.
  3. Personal loans can be secured or unsecured.
  4. Personal loans charge high interest rates and loan fees.
  5. To determine eligibility criteria, lenders look for credit score, income, and debt-to-income ratio.

Discover the Quickest Way to Secure a Personal Loan

The criteria for getting a personal loan is different from lender to lender, but the below-mentioned steps can quickly answer your question: How do you get a personal loan?

  1. Credit score: Credit score is the important element that decides whether you are eligible for the loan. The same is true with personal loans, and before applying for a personal loan, it is good to check your credit score. You can ask the bank or credit card provider to do it on your behalf or use credit score websites to do it yourself. You can easily find a lender if you know your credit score and in what category you fall.

  2. Find ways to improve your credit: If your credit score is fair to low, you must find ways to improve it. Pay your outstanding debts and ensure your credit report is error-free.

  3. Determine your monthly payment: Determining how much you can pay each month is always good. Review your income and expenses to keep out the amount for monthly debt payments. This will help you to take the easiest loan you can repay.

  4. Opt for prequalification process: Many lenders offer a prequalification process. This won’t impact your credit score. Contact several lenders to find the best option that suits and fulfills your needs.

  5. Submit your application: Submit your personal information, like identity proof, contact details, social security number, employment proof, etc, to the lender of your choice and complete the process.

What makes me eligible for a personal loan? 

Lenders always look for your eligibility, and to check your eligibility, lenders want to know your:

  1. Credit score: Credit score is used to determine whether you can repay the loan. It shows your credit history. The credit score is between 300-850; the higher the score, the more likely you will get the loan.

  2. Income: You must have a reliable source of income. Lenders look for a steady income. However, the minimum requirements differ from lender to lender, but you need to have more and enough income to pay your current and new debts.

  3. Debt-to-income ratio (DTI): DTI or debt-to-income ratio is one of the five basic criteria determined by the lenders to see the eligibility of the borrower. The ratio calculates how much you pay from your monthly income to pay off your debts. If you have a low DTI, you are more eligible for the loan. For personal loans, the debt-to-income ratio must be lower than 36%, but in some cases, lenders can accept up to 40%.

  4. Collateral: Most personal loans are unsecured, but if your credit score doesn’t work in your favor, you will not qualify for unsecured loans. To cut the line, there is an option for a secured loan where you provide a valuable asset as collateral to secure the loan. 

Are Personal Loans taxable? 

The Internal Revenue Service or IRS is responsible for taxation in the country. If we consider personal loans, they can’t be treated as the borrower's income, despite one exception- if the lender forgives the loan. In case of forgiveness of a loan, it is treated as cancellation of debt income, and such income is subject to taxation. 

Personal loans are not taxable, but if the debt is absolved, you must pay the tax as the loan is now your income.

Pros and Cons of Personal Loan 

It is always good to consider the advantages and disadvantages before seeking a personal loan:

Pros of Personal loan

  1. You get your loan all at once: You get a lump sum you can use for various needs. Whether you want to make a big purchase, combine your debts or renovate your house, you get the whole loan amount at once. You can easily manage your finances with lump-sum amounts having fixed interest rates. 

  2. You get your loan quickly: Personal loans get approved soon, which is good when you need money urgently or have an emergency. Many lenders transfer the amount the day after approval. 

  3. You get the loan at a lower interest rate: Personal loans are not low-priced but more convenient than credit cards. The average personal loan rate is 11.25%, and the average credit card rate is 20.72%. Also, personal loans provide more amounts than credit cards.

  4. You get the loan for various purposes: Some loans are provided specifically for a purpose, like home loans, which are given only if you want to purchase a new house, and auto loans, provided if you buy a new car. A personal loan comes in if you want to pay a medical bill or consolidate a debt.

Cons of personal loan

  1. You get the loan at higger rates: Personal loans are expensive as the interest rate is quite higher. The lender may charge a high-interest rate if your credit score needs to improve.

  2. You need to prove your eligibility: Personal loans need more eligibility than other loans. If you have good credit or a short financial history, then many lenders will only approve the loan if you have good credit. It means bad credit restricts your qualification for the loan.

Why do people get denied personal loans? 

The specific criteria for a personal loan depend on the lender, and to qualify for the personal loan, you need to fulfill the criteria. In any case, if you fail to qualify or do not meet the requirements specified by the lender, your personal loan may not get approved.

  1. If you are under 18, you are not a resident of the country, or you need valid income proof, there is a possibility that your personal loan may be denied.
  2. Apart from these, a low credit score, low income, high debt-to-income ratio, and any mistake in the application can result in the denial of a personal loan.

How much income is needed for a personal loan?

The requirement of income for personal loans depends on the lender. Different lenders impose different income requirements to ensure you can repay the loan on time.

  • SoFi requires a minimum salary of $45,000 annually while Avant requires just $20000. 
  • Some lenders need to disclose their minimum income requirement for personal loans.

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03 Dec, 2023

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