Personal loan requirements: what lenders check

The five things almost every lender looks at

1. Credit history. Payment history and balances on your accounts. In the FICO model, payment history carries about 35 percent of the weight and amounts owed about 30 percent.
2. Income. Regular, verifiable income from any lawful source, such as wages, self-employment, retirement, Social Security or disability benefits. Lenders cannot treat public-assistance income differently under the Equal Credit Opportunity Act.
3. Debt-to-income ratio. Monthly debt payments divided by gross monthly income. Limits differ by lender.
4. Stability. Time at a job or in the same line of work, and a steady address.
5. Identity and residency. Government ID, a Social Security number or taxpayer ID, and a U.S. address.

Documents worth gathering

• Last two pay stubs, or the last two years of tax returns and recent bank statements if self-employed
• A photo ID and proof of address
• Statements for any debt you want to pay off, with account numbers and payoff amounts
• Bank account information for funding and payments

Why applications get declined

• Debt payments already take up too much income
• Recent late payments or collections
• A credit file with very few accounts
• Income a lender cannot verify
• Too many recent applications

Each of these has a fix. High DTI can be lowered by asking for a smaller amount. Thin files can improve with on-time payments on one small account. Unverified income often just needs better documents.

What not to do

Do not submit applications to many lenders at once without checking whether they use a soft pull first. Each hard inquiry is recorded; prequalification that uses a soft pull is not.

Requirements by situation

Requirements are not the same for every lender, but the questions are. Use the table to see what a typical lender will want to verify in your situation.

Debt-to-income, in plain terms

Debt-to-income is your total monthly debt payments divided by your gross monthly income. If your income is $4,000 a month and your debts and housing payments total $1,600, your ratio is 40 percent. Lenders set their own limits and some look more closely above the mid-30s to low-40s percent range, but there is no single rule. The CFPB explains the measure. To improve it, lower the debts, raise documented income or ask for a smaller amount.

What counts as income

Wages, self-employment profit, Social Security, pensions, disability benefits, alimony or child support if you choose to disclose it, rental income and investment income can all count if documented. Lenders cannot discount income because it comes from public assistance, and they cannot treat applicants differently because of protected characteristics under the Equal Credit Opportunity Act. Tips and overtime usually count when there is a history.

Typical timeline from application to funding

1. Prequalification: minutes, usually a soft inquiry.
2. Full application and documents: a day or two to submit.
3. Underwriting review: from hours to a few days.
4. Disclosures and signing: the lender must provide the APR and finance charge before you are bound.
5. Funding: same day to several business days, depending on the method.

If you are declined

A lender that denies you must tell you why or how to learn why. Read the notice, check the credit report named in it and fix what you can. A free reports pull and a visit to a nonprofit counselor are a good next step, and our free options page lists more.

Preparing a clean application

Match the name and address on your documents, explain gaps in employment in a sentence and bring statements that show the deposits you list as income. Apply only for the amount you need. These small steps remove the reasons for delays.