Applying for a personal loan can be a great way to get the funding you need for an upcoming home renovation, debt consolidation, or even starting a business. However, like all loans, there will be specific criteria that the lender will be looking for and using to judge your application. Here’s what you need to know before you apply for a personal loan to increase your chance of success.

Your Credit Score

The main way that a lender will judge your creditworthiness is by your credit score. Your credit score (or more specifically, your FICO Score) is a number between 300 and 850 that quantifies how reliable of a borrower you are.

Although it’s possible to get approved for a personal loan with a FICO Score in the 500s and 600s, your chances will be even greater the closer you are to 850. Several online services, such as Experian, one of the three credit reporting bureaus, will provide you with your FICO Score for free.

If you find that your score is lower than expected or you know in advance that you’ve had issues with credit, try asking a trusted family member or friend with a good credit score to be a co-signer. When added to the application, a co-signer’s good credit rating will positively impact the application and will most likely help it get approved.

Debt to Income Ratio

Another metric that lenders use is your debt-to-income (DTI) ratio. This is a simple comparison of your monthly debt payments divided by your gross monthly income.

Studies have shown that people with a DTI of 43 percent or higher will have difficulty making payments. Therefore, lenders will be looking for numbers in the 20s or low 30s.

To reduce your DTI, try eliminating as many debts as possible before applying for your personal loan. For instance, if you have any 0% APR credit lines for things like appliances or furniture, consider paying them off so that your DTI will look more attractive to the lender.

Your Budget

Just because your DTI might be low enough to qualify for the loan, it doesn’t necessarily mean it won’t strain your finances in other ways. Only you know your budget and how much you can afford to pay for this monthly personal loan. This is why you’ll want to review your finances and arrive at a number you feel you can comfortably afford.


In addition to interest, most lenders will charge a one-time origination fee at the beginning of the loan. This fee is generally between 1% and 5% of the total amount borrowed. So, for instance, if you need $10,000, expect to pay between $100 and $500.

Be aware of this fee and consider it with the amount being requested. It will also be best to shop around and compare offers to find the best rate.

Assets You Can Put Up as Collateral

If you believe you might have trouble qualifying for an unsecured loan, then an alternative strategy will be to apply for a secured loan instead. “Secured” means that the loan will be backed by something you can offer as collateral, such as your vehicle.

Even though your chances of getting approved will be higher with a secured loan, you’ll want to be careful what you name as collateral. If you were to run into an issue and fail to make your payments, the last thing you’ll want is to lose an asset that you need for survival (such as your home).

The Bottom Line

There are a few things to check before applying for a personal loan. First, while metrics like your FICO Score and DTI ratio will be necessary, don’t forget to consider your budget and the extra fees involved. Also, consider offering collateral if it might help the situation.


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