If you are in the market for a personal loan, then you should learn some of the basic requirements that will help you qualify for the loan. First of all, be very careful of lenders offering you personal loans with “no credit check required.” Loans with no credit check are not personal loans, they are title loans, payday loans and cash advance loans. These types of loans carry astronomical interest rates along with extremely high fees. In some states, such as Arizona, payday loans are illegal.
Qualification Requirements for a Personal Loan
Thanks to modern day technology, the loan underwriting process is quite fast. Lenders can usually give you a loan decision within minutes. Many lenders base their decisions off your credit score, which they can pull up in a matter of minutes. Some lenders will look at your credit score and take a quick look at your income verification before they qualify you for a personal loan. However, your credit score often determines how much interest you can expect to pay, so if your credit score is low, you can expect to pay a higher interest rate.
Credit Scores and Interest Rates
Since personal loans are not backed by any collateral, the interest rates can range anywhere from 3.99 percent up to 40.99 percent. Obviously, you will receive the best interest rates if you have a high credit score. So, you might be asking yourself “what constitutes a high credit score?” According to Experian, a good FICO credit score is anything above 740. If your score is higher than 740, then you might receive the lowest rate on a personal loan.
However, you must keep in mind that many lenders also consider your debt-to-income ratio. Your debt-to-income ratio is the debt payments you pay each month divided by the income you gross each month. If your debt-to-income ratio is higher than 43 percent, then you might pay a higher interest rate on a personal loan even if your credit score is higher than 740. Although a debt-to-income ratio of 43 percent is the standard most lenders use for mortgage loans, according to the Consumer Financial Protection Bureau, it can affect the interest rate you will pay on unsecured personal loans.
Lenders that offer personal loans usually do not require much paperwork to qualify. However, very little paperwork does not guarantee an automatic qualification. If you are concerned about qualifying for a personal loan, make sure you check your credit score and calculate your debt-to-income ratio before you apply.