How to Get Approved for a Personal Loan

A personal loan helps cover expenses that do not fit into your regular budget. People often take
this type of loan to pay for medical services, home repairs, moving, or to combine credit card
debts into one payment. But getting approved is not always easy. Lenders look at several
indicators before making a decision. To increase your chances of approval, it is important to
understand how the review process works, what documents are usually requested, and how
different financial companies evaluate applicants.

Types of Personal Loans

Personal loans are divided into several types, and this affects how lenders make their decisions.
The most common option is unsecured loans. They are issued without collateral, so the lender
evaluates your credit history, income, and overall debt level. Banks, credit unions, and online
lenders offer such loans. They usThere are also secured personal loansually have a fixed interest rate and stable monthly payments.

There are also secured personal loans. These loans require collateral, for example, a car, a
savings account, or a certificate of deposit. The interest rate on such loans may be lower, but
you risk losing the collateral if you miss payments.

Many people apply for debt consolidation loans. These loans allow you to combine several
debts into one payment. Lenders often send the funds directly to your creditors to close old
debts. This type of loan does not reduce the amount you owe, but it makes payments clearer
and easier to manage.

Some lenders accept joint applications. In this case, two people are jointly responsible for the
loan. This option can help if one of the applicants has limited credit history. There is also the
option of using a co-signer. The co-signer does not receive the loan funds, but agrees to repay
the loan if the borrower stops making payments.

Borrower Requirements

Lenders set specific criteria for borrowers. These criteria help lenders evaluate whether a
person can repay the loan without financial strain.

Credit Score Requirements

Most lenders check the credit score from Equifax, Experian, and TransUnion. A FICO score
above 670 is considered good. If the score is between 580 and 669, getting a loan is still
possible, but the interest rate is usually higher. Some lenders review applications even with a
score below 580 if the person has a stable income and low debt.

Lenders most often use FICO Score 8 or FICO Score 9. Some credit unions evaluate the score
using VantageScore 3.0 or 4.0. The decision also depends on late payments, the age of the
credit accounts, and how actively a person uses their credit limit. The federal FCRA law gives
borrowers the right to dispute errors on their credit reports.

Income and Employment Criteria

Lenders check income to ensure a person can make the monthly loan payments. Banks usually
require income verification via a W-2 form, but many online lenders also accept other forms of
income. This can include a salary, hourly wages, self-employment income, Social Security
benefits, pension payments, alimony, or long-term disability benefits.

If a person works under a W-2, the lender usually asks for pay stubs for the past 30 days. Self-
employed borrowers most often need to submit last year’s tax return (IRS Form 1040) and
Schedule C. Some lenders may request a current-year profit-and-loss statement or 1099 forms.
To verify employment, the lender may contact the employer directly or use an automated
verification system.

Debt-to-Income Ratio

The debt-to-income ratio (DTI) shows what part of your income goes toward debt payments
each month. Many lenders use requirements similar to those used in mortgage lending. A DTI
below 35% is considered a good level. A ratio from 36% to 45% may also meet the
requirements, but in these cases, the interest rate is usually higher. Some lenders are willing to
work with a DTI up to 50% if the borrower has a stable income.

The DTI calculation includes student loan payments, credit card payments, auto loan payments,
and other regular obligations. Rent is not always included — it depends on the lender’s policy.
The calculation itself is simple: the total monthly obligations are divided by gross monthly
income. The CFPB website offers a free calculator to determine your DTI.

Required Documents

Lenders may request several documents to verify identity, income, and residency. Applicants
can prepare these documents before applying to speed up approval. Common documents
include:

• Government-issued ID, such as a driver’s license or passport
• Social Security number or Individual Taxpayer Identification Number
• Recent pay stubs
• Bank statements
• Prior-year tax returns for self-employed applicants
• Utility bills, lease agreements, or other proof of address
• Contact information for employers

These documents support lender compliance with the USA PATRIOT Act and Know Your
Customer (KYC) rules, which require identity verification for fraud prevention.

How Online Lenders Review Applications

Online lenders use automated systems to review applications quickly. These systems look at credit history, income, regular expenses, and bank account data. Many lenders use digital verification services such as Plaid or Finicity. They provide secure and limited access to transaction information.

Algorithms help online lenders make decisions faster. When assessing risk, they focus on
income stability, average account balance, and payment history. Some lenders also use
additional data, for example, rent payments, utility payments, or consistent cash flow.

A decision is usually made within a few minutes or hours. If the application is approved, the
funds can be deposited on the same day or on the next business day. This depends on the
bank’s processing schedule and the ACH transfer cutoff time.

How Banks and Credit Unions Review Applications

Banks and credit unions use a more familiar, traditional approach to reviewing applications.
Because of this, they often request more documents and take longer to make a decision. In
many cases, they review a credit history manually. This helps them take a closer look at people
with a short credit history or those who have faced financial difficulties in the past.

Credit unions usually offer lower interest rates because their members own them. They often
consider applications from people with lower credit scores if the borrowers have a stable
membership history or regular account activity. For people with limited credit experience, credit
unions sometimes use manual underwriting.

Banks tend to rely on long-term customer relationships. If someone has been using a checking
or savings account at the same bank for many years, they may qualify for better terms. Banks
also check the account’s overdraft history. The Equal Credit Opportunity Act (ECOA) prohibits
discrimination based on race, sex, marital status, or national origin, but allows lenders to
consider financial behavior.

Steps to Apply

Borrowers complete several steps to apply. Each step helps lenders evaluate financial stability:

1. Review your credit reports and fix any errors.
2. Estimate how much you want to borrow and calculate an affordable monthly payment.
3. Collect documents such as ID, pay stubs, bank statements, and tax returns.
4. Prequalify with multiple lenders to compare offers.
5. Select a lender and complete the full application.
6. Wait for the lender’s hard credit check and final review.
7. Sign the loan agreement after reviewing the APR, fees, and repayment schedule.

How to Strengthen Your Application

Borrowers can take several steps to increase their chances of getting approved for a loan.
These actions reduce the lender’s risk and help the borrower qualify for a better interest rate.

To start, it is useful to check credit reports on AnnualCreditReport.com — this is the only
website that is authorized by federal law to provide free weekly reports from all three credit
bureaus. If you find any errors, you can correct them so they do not lower your score. Paying off
part of your credit card debt reduces your credit utilization. A few months of on-time payments
also help raise your score and show that you are reliable.

Some people lower their DTI by paying off small debts before applying. Others try to increase
their income, for example, by taking a part-time job or documenting additional sources of
earnings. It is important to keep bank accounts in good standing. Lenders may review account
activity to understand how a person manages their finances.

It is better not to open multiple new credit accounts at once. Many hard inquiries can reduce the
chance of approval. Preparing all necessary documents in advance helps avoid delays.

When a Co-Signer Can Help

A co-signer can support an application when a borrower has limited credit or a higher DTI. The
co-signer’s credit and income are included in underwriting. Many lenders allow co-signers, but
banks and credit unions are more likely to accept them than online lenders.

A co-signer must understand the responsibility. Missed payments appear on both credit reports.
If the borrower defaults, the co-signer becomes responsible for repayment. Federal law requires
lenders to provide a “Notice to Cosigner” form explaining these obligations.

What to Do If You’re Denied

Borrowers who receive a denial can take steps to improve their chances. They can review the
adverse action notice to understand the exact issue. If the problem relates to credit, applicants
can work on building payment history or lowering utilization. If the issue is income, applicants
may need to provide additional documentation or stabilize employment.

Borrowers can try credit unions, which may be more flexible. They can also consider joint
applications or co-signers. It may help to wait several months before reapplying, so scores have
time to recover from hard inquiries.

How to Spot Unsafe or Predatory Lenders

Borrowers should avoid lenders that do not provide clear disclosures or charge excessive fees.
Predatory lenders often bypass credit checks, advertise guaranteed approval, or hide total loan
costs. Many operate outside state regulations.

Consumers can check a lender’s license through their state’s financial regulatory agency. The
CFPB and Federal Trade Commission also publish lists of enforcement actions against unsafe
lenders. Reading customer reviews and verifying physical business addresses can help identify
reputable institutions.