A personal loan is the best option when you need money to pay for expenses not covered by your current income. If you are looking to finance a wedding, buy a new car or pay off debts, then a personal loan will be your best choice.
Many lenders provide personal loans to borrowers with bad credit. However, before you apply for one, make sure that you meet all of the requirements. Here are some of them:
- Credit Score
- Income
- Debt-to-Income Ratio
- Collateral
- Origination Fees
Credit Score
An applicant’s credit score is one of the most important factors in a personal loan application. Lenders use credit scores to assess their risk in lending money to a borrower. A low score can make getting a loan more difficult, and a high score can make it easier.
A good credit score is usually considered to be above 700 (though this varies, depending on the lender). If your score is below that number, it may mean that you have too many loans or debts or that you’ve made late payments in the past. Either way, companies hesitate to give you more credit because they don’t think they’ll be paid back.
If you have less than stellar credit, there are still options for getting money from a lender—but these options may not be as attractive as those with great credit scores.
Income
Your income is another important factor in a Personal loan. The income has to be enough to pay back the personal loan. This is a bad sign for the lender if you are earning less than your monthly expenses. The lender will reject your application because they cannot trust you with a loan when you cannot even afford your daily expenses.
Debt-to-Income Ratio
Debt-to-income ratio is a key factor in Personal loan applications. It is calculated by dividing your total monthly debt payments by your gross monthly income (before taxes).
This ratio determines how much you can afford to pay back each month. If an applicant’s Debt-to-income Ratio is too high, they may not be able to qualify for a personal loan.
Collateral
Your lender will require collateral if you’re applying for a secured personal loan. Collateral is the property you pledge to the lender as security if you cannot repay the loan. A lender may request as much as 10% of the loan amount in collateral, but they often only require between 2% and 5%.
Origination Fees
Origination fees are not part of the qualification process, but many lenders require borrowers to pay personal loan origination fees. Origination fees are typically charged when a lender processes your application or when they approve or decline your loan request.
If you’ve been denied for any reason or applied and were declined but want to try again, you can often appeal the decision by asking your lender to waive the origination fee. If they refuse, consider looking at other lenders who may be more willing to work with you or offer options that meet your needs.
