A young man reviews personal loan requirements online using a laptop computer.

Personal loans can be used for almost any purpose. They are one of the most flexible ways to borrow money at competitive interest rates. Whether it’s cash for a special occasion, funds for tuition, money for home improvements, or consolidating debt, you can apply for the cash you need and never pay any fees* at APGFCU. 

But what are the requirements for a personal loan? And how can you make sure you apply at the right time? Keep reading to learn more about the ins and outs of personal loan requirements.

Credit History

Your credit score and history are key factors in determining your eligibility for a personal loan. Generally, the higher the credit score, the more likely you are to receive the most favorable interest rate. The average score, according Equifax, typically falls into the following categories:

  • 800-up: Excellent 
  • 740-799: Very Good
  • 670-739: Good
  • 580-669: Fair

If you’re looking to rebuild your credit or don’t have much history at all, take steps to build your credit before you apply. On-time payments and the amount of credit you use relative to credit limits have the biggest impact on your score.

Don’t forget to fix any errors that might be dragging down your score. You can request your free credit report and dispute wrongly reported missed payments or any other inaccuracies it may contain.

Proof of Income

Like most personal loan requirements, “proof of income” can mean different things for different lenders. Confirm what documentation will be needed prior to applying. Some lenders may require pay stubs or W2s, while some may need a signed letter from your employer. If you’re self-employed, this could mean you’ll need to submit a copy of your tax returns. 

But remember, it is best to have a secure and stable income before considering a personal loan. Determine the specific loan amount you need, and avoid borrowing more than that. A larger loan amount will result in more interest charges and higher monthly payments, which could strain your budget.

Ability to Cover Your Current Debt

To satisfy a personal loan requirement, you must be able to cover your current debt. Lenders will look at your debt-to-income ratio (DTI), which compares your gross monthly income to the monthly payments you make toward your outstanding debt. They will want to determine if you can take on additional debt and maintain the payments.

Since your DTI ratio doesn't have varied monthly expenses, you may consider budgeting beyond what your DTI labels as “affordable” for you. You can use online calculators to determine your DTI and learn what it means. 

As a general rule, aiming below the 36% DTI target is ideal — meaning, your total monthly debts divided by your gross monthly income should be less than or equal to that percentage. For example, if you have $1,000 of monthly debt and make $3,500 a month, then your debt-to-income percentage would be 28%, well below the recommended 36%.

Adding a Co-Borrower

If you don’t qualify alone, you may want to consider a co-borrower. Your co-borrower agrees to pay the loan if you are unable to at any point in the life of the loan. This is viewed as an extra layer of security and may improve your chances of qualifying for a personal loan.

But remember the reverse of this too — both names on the loan also mean the credit history of you and your co-borrower are taken into account for approval. Your co-borrower might see a decrease in their credit score if you ever miss a payment.

Type of Personal Loan

Loans typically fall into two categories: secured and unsecured. Personal loans are usually unsecured.

However, in some cases, a personal loan may be secured. In this case, collateral will need to be used to secure the loan. Ask for details if you’re considering a secured loan. What is offered can vary and you’ll want to confirm you qualify for any specific guidelines and standards.

Personal Loan Requirements and What’s Right for You

A personal loan can be a helpful financial tool when you need money for a big expense or to consolidate debt. It’s important to make sure you are ready to satisfy any personal loan requirements before applying. Consider these five main characteristics used to evaluate potential borrowers for both personal and business needs. 

Taking out a personal loan is a personal choice. But is it the right choice? Here at APGFCU, we can help you determine what works for you. Learn more about determining if the time is right for a personal loan. Let us help you along the way!

When Is a Personal Loan the Right Choice?

*Excludes late fees 

“This article has been provided for educational purposes only and is not intended to replace the advice of a loan representative or financial advisor. The examples provided within the article are for example only and may not apply to your situation. Since every situation is different, we recommend speaking to a loan representative or financial advisor regarding your specific needs. 

All loans subject to approval.