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Qualifying for a Personal Loan – How Lenders Determine Your Eligibility

You’ve considered the pros and cons of personal loans and decided a personal loan is right for you. But before you begin the personal loan application process, you need to know whether you’re eligible for a loan in the first place.

Lenders have the final say on personal loan eligibility, and no two lenders weight the factors discussed below in precisely the same way. However, you can do quite a bit to strengthen your credit profile and increase your appeal to lenders. Here’s what you need to know about the demographic, financial, and credit factors lenders use to determine whether you’re eligible for a personal loan.

Non-Credit Factors

Lenders commonly use these non-credit factors to assess borrower suitability and eligibility.

1. Age

In the United States, prospective borrowers applying without a cosigner must be at least 18 years old. Some states have higher minimum age requirements. Mississippi borrowers must be at least 21 years old, for example, while Alabama and Nebraska require borrowers to be 19 years or older.

Your age doesn’t directly affect your personal loan rates or terms, but some key credit and non-credit factors are closely correlated with age. For example, younger borrowers are unlikely to have high incomes, long employment histories, or long records of timely repayment. Cosigning a personal loan application is a great way to build credit for your child, even after they turn 18.

2. Location

Not all personal loan providers lend nationwide. Traditional banks and credit unions generally issue personal loans only in states where they have physical branches or some other operational presence. This information is usually available on institutions’ websites.

Online-only lenders, including peer-to-peer (P2P) lenders such as Lending Club, may have geographical restrictions as well. For instance, due to restrictive state laws, P2P loans aren’t available to Iowa borrowers. Lender websites should spell out any geographical restrictions .

3. Employment & Income

Personal loan providers generally require you to demonstrate stable, regular income from an employer or government benefits. You may disclose certain other sources of income, such as alimony and child support, but aren’t required to do so by law.

If your income comes largely or wholly from self-employment, you may struggle to qualify for personal loans with competitive rates and terms. Depending on lender policy, you may need to demonstrate at least 12 months of self-employment income. Similar standards apply to formally incorporated business borrowers.

Income minimums for individual borrowers are typically low – $20,000 per year or less. Business borrowers may face higher minimum revenue requirements of $50,000 or more. That said, since it’s a key component of debt-to-income ratio, your income directly impacts the rates and payment terms you receive.

4. Citizenship Status

Most lenders require that prospective personal loan borrowers be U.S. citizens or permanent residents. Certain types of personal loans, such as student debt refinancing loans, may be less restrictive. For instance, SoFi’s student debt refinancing products are available to J-1, H-1B, E-2, O-1, and TN visa holders, in addition to U.S. citizens and permanent residents.

Most lender websites clearly spell out citizenship and residency criteria. Contact customer support with any questions you have about specific visa types.

5. Education

Not all lenders require borrowers to meet minimum education standards. Such standards are more common for education-related loans, such as student debt refinancing products, where the borrower’s ability to repay depends strongly on future employment prospects and income.

Lenders who do have education standards typically require a bachelor’s degree or higher. Certain specialized loan types, such as professional student loan refinancing, may require professional, graduate, or post-graduate degrees.

6. Assets & Collateral

Personal loan providers may factor in your liquid and non-liquid assets when determinating your eligibility.

Borrowers with substantial liquid reserves, such as cash and equities in non-restricted accounts, are less likely to default on their loans than cash-poor borrowers. In particular, traditional bank lenders may demand that borrowers show ample proof of liquidity before originating personal loans.

Though unsecured personal loans are more common than secured personal loans, some lenders do offer secured personal loans, often at lower interest rates than unsecured loans. A secured personal loan requires collateral sufficient to secure its principal – say, a vehicle with a fair market value of $10,000 to secure a $10,000 loan. A borrower without suitable collateral, such as equity in a home or vehicle, won’t qualify for a secured personal loan.


Credit Factors

Lenders commonly use these credit factors to assess borrower risk and determine eligibility.

Each lender weights these factors – or disregards them entirely – according to its own standards. When deciding whether to originate a loan, lenders that cater to borrowers with excellent credit are apt to be less forgiving than lenders that accept a wider range of credit profiles.

1. Credit Score

Your credit score is a snapshot of your credit risk, or how likely you are to default on a loan or other obligation. The adverse effects of a bad credit score go far beyond higher credit card interest rates and denied loan applications; a bad credit score could affect your job prospects, housing choices, and even your ability to get a decent cell phone contract.

For U.S.-based consumers, FICO is the gold-standard credit scoring model. FICO’s principal consumer credit scoring model has five distinct factors:

  • Credit utilization ratio
  • Repayment history
  • Length of credit history (average age of accounts)
  • Credit mix (types of credit)
  • New credit (recent credit inquiries)

FICO scores range from 300 to 850, with borrower risk grouped as follows:

  • Super-Prime. FICO scores between 740 and 850 are super-prime. Super-prime personal loan applicants qualify for lower interest rates and higher borrowing limits – up to the lender’s maximum – than any other borrower group.
  • Prime. Prime scores fall between 680 and 739. Prime borrowers qualify for relatively low interest rates and relatively high borrowing limits.
  • Near-Prime. Near-prime scores range between 620 and 679. Most online-only personal loan providers lend to near-prime borrowers, but they offer higher rates and lower borrowing limits as a result. Traditional bank lenders may restrict near-prime offerings or avoid this borrower class altogether.
  • Sub-Prime. FICO scores below 619 count as sub-prime. Most bank lenders avoid this borrower class. Online-only lenders may issue high-APR, low-principal loans to sub-prime borrowers.

These ranges may be slightly different in other scoring models, such as VantageScore, a FICO competitor developed jointly by the three major consumer credit reporting bureaus. But generally speaking, scores well above 700 on a 300-to-850 range are considered excellent, while scores well below 650 are considered poor.

How to Improve Your Credit Score

For starters, brush up on these tips to improve your credit score. Start by checking your credit score for free through Credit Sesame if you haven’t done so recently, then follow the recommendations in the sections below to take concrete steps toward building credit and improving your credit score.

Pro tip: You can sign up for Experian Boost and instantaneously increase your credit score for free. Experian will factor in payments made to phone and utility bills when calculating your credit score.

What to Avoid

As you work to make timely debt payments and reduce your overall debt load, do your best to avoid major adverse events that could jeopardize your progress.

For accounts that report monthly to consumer credit reporting bureaus, even a single missed payment can negatively impact your credit score. For accounts that don’t report monthly, the hit comes when the creditor charges off your debt and sends the balance to a collections agency, typically after 180 days of non-payment. Over time, mounting debt may compel you to declare personal bankruptcy, another major adverse event. Bankruptcies and chargeoffs negatively impact your credit score until they age off your credit report, usually after seven years.

2. Credit Utilization Ratio

Your credit utilization ratio accounts for 30% of the total weight of your five-factor FICO credit score. It’s calculated by dividing your total available revolving credit – the cumulative borrowing limit of all your active revolving credit lines – by the total amount of credit you’ve used.

Your credit utilization ratio only includes revolving credit lines, such as credit cards, personal lines of credit, and home equity lines of credit. It doesn’t include secured or unsecured installment loans, such as mortgages and personal loans.

For example, say you have:

  • A cash back credit card with a credit limit of $5,000 and a current balance of $1,500
  • A travel rewards credit card with a credit limit of $10,000 and a current balance of $4,000
  • An unsecured personal line of credit with a borrowing limit of $10,000 and a current balance of $7,000

In this case, your total available credit would be $25,000, and your total credit used is $12,500, for a credit utilization ratio of 50%.

Most lenders favor credit utilization ratios under 30%. In this example, you’d be overstretched and should pay down at least $5,000 in debt.

How to Improve Your Credit Utilization Ratio

Keep in mind lenders’ preferred credit utilization ratios and be strategic about applying for and maintaining your credit. For instance, I have a half-dozen or so credit cards that I rarely or never use, some dating back a decade. These old, under-utilized credit accounts keep my overall credit utilization ratio in check.

If you don’t want to apply for a new credit card to boost your credit utilization ratio, consider requesting a credit line increase on an existing card.

What to Avoid

Avoid carrying balances on revolving credit lines, such as credit cards and home equity lines of credit. In some cases, carrying a balance is unavoidable or even advisable – for instance, when you qualify for a 0% APR balance transfer promotion or tap a home equity line from Figure.com for low-interest home improvement project financing. In these cases, have a plan to pay down the balance in a timely fashion.

Also, absent serious financial strain or an abrupt change in your financial situation, maintain older, balance-free credit accounts to keep your cumulative credit limit high and your credit utilization ratio low.

3. Repayment History

Repayment history is the single most important component of your FICO score, accounting for 35% of the total weight. Unlike credit utilization, repayment history encompasses revolving credit lines and installment loans. The FICO model is less forgiving of missed installment loan payments, but neither is good.

Missed payments remain on your credit report for seven years, so missing just one due date on a credit account may have serious long-term implications for your credit score.

How to Improve Your Repayment History

Get in the habit of paying all of your credit accounts on time – and, for revolving credit lines, in full. Before applying for your first personal loan, establish a pattern of timely repayments by opening a low-limit credit card and paying off the balance in full each statement cycle. Check your credit report for older missed payments; depending on how urgently you need the loan, you may be better off waiting until they age off your record.

What to Avoid

Avoid missing payment due dates. If you struggle to keep track of your due dates, set up automatic payments on the date of your choosing each month, if you can. Should your financial circumstances change, try to work out modified payment plans with individual creditors or enroll in a credit counseling service that does this on your behalf.

4. Credit History Length

Length of credit history accounts for 15% of the FICO model’s weight. The most important variable here is the average age of all your open or recently opened credit accounts. That includes all of your open, active credit accounts that are six months or older, plus:

  • Accounts closed in good standing within the past 10 years
  • Delinquent accounts closed within the past seven years

For example, say you have:

  • One credit card opened two years ago this month
  • Another credit card opened five years and six months ago
  • A personal line of credit opened three years and three months ago
  • A store credit card opened eight years and nine months ago

In this case, your average account age is (2 + 5.5 + 3.25 + 8.75) / 4 = 4.875 years.

The age of your oldest and newest credit accounts matter too. The longer you’ve had credit, the better, all other things being equal. If it’s been longer than 10 years since you’ve had an open credit account – or seven years if your last account was closed as delinquent – then you’re considered a new credit user under FICO’s rubric, and you don’t have a FICO score.

How to Improve Your Credit History Length

Keep older credit accounts open, even if you rarely or never use them. Like my low credit utilization ratio, my lengthy credit history is helped by my collection of old, dormant credit cards. If you’ve yet to build credit or find yourself rebuilding credit after bankruptcy, apply for a low-limit secured credit card or retail credit card, such as a branded gas credit card, to establish the beginnings of a credit history.

What to Avoid

Don’t be too quick to close older credit accounts for convenience’s sake. Where possible, stagger account closings so they don’t adversely affect your credit history length.

5. Credit Mix

Your credit mix accounts for just 10% of your FICO weight, but it still matters. Credit types included in this mix are:

  • Installment loans (such as unsecured personal loans and auto loans)
  • Mortgage loans (which are distinct from other installment loans for scoring purposes)
  • Retail credit accounts and store cards
  • Bank credit cards backed by payment networks such as Visa and Mastercard
  • Loans sent to collections
  • Certain contractual obligations, such as rent and utility payments (only certain scoring models consider these)

The FICO scoring model considers installment and mortgage debt less risky than credit card debt. The thing most likely to hurt your credit mix – and credit score – is a credit portfolio consisting largely or exclusively of credit cards.

How to Improve Your Credit Mix

Balance higher-risk credit types, such as credit cards, with lower-risk types, such as secured installment loans. For example, even if you can afford the full cost of a used car out of pocket, consider taking out a secured auto loan to finance a portion of the purchase price.

What to Avoid

Don’t chase credit card sign-up bonuses – or at least, don’t open too many credit cards in succession simply to capitalize on limited-time welcome offers. Accumulating unnecessary credit card accounts can prevent you from having a balanced credit portfolio.

6. New Credit

New credit accounts for the final 10% of your FICO score weight. This factor has several distinct components, including:

  • The number of your recent credit inquiries (hard credit pulls made in the process of applying for new credit)
  • The number of new credit accounts you opened within the past 12 months
  • Time elapsed since your most recent credit inquiry
  • Time elapsed since your most recent account opening

Generally, the more new credit inquiries and accounts you have, the lower you’ll rank for this factor. However, the FICO model may treat multiple credit inquiries made in quick succession – say, three distinct loan applications made within five business days – as a single inquiry. In other words, if you’re shopping around for the best personal loan rate, and you’re organized and efficient enough to complete the application phase within a short period, it may not impact your FICO score or future personal loan eligibility.

How to Improve Your New Credit

Confine your loan shopping to a short period – ideally, no longer than two weeks. Submit your applications in quick succession to increase the likelihood that credit scoring models will treat them as a single inquiry.

What to Avoid

Avoid drawing out your search for a personal loan over many weeks or months. Hold off on applying for other credit accounts, including credit cards, until you’ve accepted a loan offer.

7. Debt-to-Income Ratio

Though debt-to-income ratio doesn’t directly factor into the FICO scoring model, it’s a major consideration for loan originators. Debt-burdened borrowers have less flexibility to take on new debt, even if they have ample income and prime or super-prime credit.

Calculate your debt-to-income ratio by dividing your total monthly debt obligations by your total monthly gross income. For instance, if your total monthly debt payments add up to $2,000, and your total monthly gross income is $5,000, your debt-to-income ratio is 40%.

For debt-to-income calculation purposes, debt obligations include, but aren’t limited to:

  • Minimum credit card payment amounts (regardless of your actual balance or payments)
  • Housing payments (rent or mortgage, including escrow)
  • Home equity loan and line of credit payments
  • Education loan payments
  • Auto loan or lease payments
  • Unsecured personal loan payments
  • Payments on any loans you’ve cosigned
  • Alimony and child support payments

Debt obligations usually exclude:

  • Insurance premium payments
  • Utility payments
  • Tax payments, except for property taxes included in escrow
  • Recurring household expenses

According to the Consumer Financial Protection Bureau, most mortgage lenders balk at debt-to-income ratios above 43%, and they prefer ratios at or below 36%. Personal loan providers may tolerate higher debt-to-income ratios; however, the higher your ratio, the less like you are to qualify for the most favorable rates and terms.

How to Improve Your Debt-to-Income Ratio

Prioritize your debt repayments on credit line balances over installment loan balances. For instance, redirect the $100 per month you pay in additional principal on your mortgage to the balance on your low-APR credit card before the 0% APR introductory promotion period ends. Look for opportunities to increase your income from passive sources, side hustles, or part-time work in addition to your full-time job. Even small income boosts add up; $100 extra per week increases your total income by $5,200 per year, or 10% of a $52,000 annual salary.

What to Avoid

Under normal circumstances, avoid carrying balances on revolving credit lines such as credit cards, personal lines of credit, and home equity lines of credit.

8. Cosigner Status

If you struggle to qualify for a personal loan, or you’re unhappy with the rates and terms you’ve received, you may want to consider approaching friends or relatives with excellent credit about cosigning your loan.

Bear in mind that cosigning is a great deal for borrowers, but it’s not a good deal for cosigners. Cosigners are fully responsible for the cosigned loan, which means that:

  • The cosigned loan affects the cosigner’s debt-to-income and credit utilization ratios.
  • The lender – and, later, collections agencies – can collect from the cosigner if the primary borrower falls behind on payments.
  • The cosigner’s failure to repay could result in court-enforced judgments and liens.
  • Missed payments and chargeoffs adversely affect the cosigner’s credit.

Still, if your credit and non-credit factors are too weak for your application to stand on its own, and you can’t wait for your position to improve, cosigning is a viable option. Just count yourself fortunate if a cosigner loves you enough to assume such risk.

How to Get a Cosigner

Work with a cosigner willing to bear responsibility for the loan should you fall behind on your payments. The ideal cosigner is a family member – such as a parent, spouse, or domestic partner – with strong credit and a clear understanding of their obligations.

What to Avoid

Don’t allow your cosigning arrangement to hurt your relationship with the cosigner. Have a frank pre-signing conversation with them that covers how you’ll make things right should you run into financial trouble while the loan remains outstanding.

Final Word

Thanks to an onslaught of online-only lending startups, the market for unsecured personal loans has never been as competitive and transparent as it is today. On balance, that’s great news for prospective borrowers, including near- and subprime borrowers used to far slimmer pickings.

Also, financial innovations like UltraFICO – an alternative credit score designed for consumers with limited credit histories – put mainstream financing options within reach of millions of formerly ineligible consumers.

All told, it’s an exciting time to explore the unsecured personal loan market. If you’re a first-time borrower, or you haven’t looked into your borrowing options in a while, prepare to be surprised by the sheer variety of loan options at your disposal, as well as lenders’ eligibility criteria for borrowers across the credit strength spectrum.

If you’re searching for a personal loan, begin with Credible.com. They will provide you with rates from up to 11 different lenders in just minutes.

Have you applied for a personal loan recently? Did you learn anything from your credit report? If your application was denied, was the lender’s feedback helpful?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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