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Personal Loans: What Are They and Do You Qualify?

Personal Loans: What Are They and Do You Qualify?

Jenius Bank Team4/4/2023
A woman sitting on the ground with a laptop.

A personal loan can help you fund a dream project or handle an unexpected expense.

This article is part one of a two-part series. Check out part two here.

Maybe you’ve finally decided to get moving on that kitchen remodel you’ve been dreaming about. (Goodbye, dated backsplash!) Maybe you want to pay off your credit card debt. Or a sudden injury left you with a pricey medical bill. Enter: the personal loan.

Every year, millions of Americans seek personal loans for access to quick cash and flexible funding. But how much do you really know about personal loans? We’ll cover all the ins and outs — from how to qualify to how you can use them.

Key Takeaways

  • Personal loans offer flexible funding for just about anything, from debt consolidation to medical bills.

  • Qualification requirements vary from lender to lender, but your credit score, debt-to-income ratio (DTI), and payment history are among the top things lenders consider.

  • Prequalifying for a loan lets you compare offers, possibly without affecting your credit score.

What’s a Personal Loan?

A personal loan is money you borrow from a bank, credit union, or other organization that you pay back over time, generally between one and five years. They’re typically unsecured (meaning they don’t require collateral), and your creditworthiness is a significant factor in your chance of approval.

This money can be used for just about anything — from celebrations of major milestones (like a wedding or dream vacation) to tackling unexpected expenses. With lower rates on average than credit cards, many people also turn to personal loans to consolidate high-rate debt to help them save on interest.

Taking out a personal loan can provide a sense of certainty when it comes to repayment, as these loans typically have fixed payments and interest. This means the same amount is due each month, making it easier to budget the payback.

When comparing personal loan options, don’t just look at rates. Be sure to also watch out for fees, particularly prepayment penalties that charge you if you pay the loan off early.

You might be wondering, what’s the catch? This sounds too good to be true. For the most part, personal loans may be the flexible funding and support you need. But before you run to your bank to take out a personal loan, there are a few things you should know.

How Do I Qualify for a Personal Loan?

So, you’ve decided a personal loan might be right for you. What now? To get the most favorable terms, you’ll have to meet a lender’s specifications. These requirements will vary from lender to lender, but here are a few of the most common criteria.

Your Credit Score Counts

Your credit score is one of the most important factors. As a quick refresher, credit scores range from 300 to 850. The lower the score, the higher the perceived risk from the lender’s point of view, and a score below the mid-600s may make it difficult to get a loan. Most lenders consider a score over 800 excellent.

You can check your credit score from the different credit bureaus at

On-Time Payments Make a Good Impression

Did you know a single late payment can stay on your credit report for up to seven years?¹ Lenders look at your payment history to check your track record of making payments both in-full and on time.

Payment history also goes hand-in-hand with our last point, as it makes up 35% of your FICO credit score² — all the more reason why making payments on time is crucial to increasing your odds of getting approved.

Proof of Reliable Income

No surprise, lenders do look for applicants that have sufficient income to repay loans. Specific income requirements vary, but lenders want to make sure you can cover your loan payments, as well as your current obligations.

When it comes time to submit information about your income, you’ll want to gather recent tax returns, monthly bank statements, pay stubs, or signed letters from employers declaring your salary if you don’t have pay stubs. If you’re freelance or self-employed, lenders may allow other methods of demonstrating income.

Your Debt-to-income Ratio

Your debt-to-income (DTI) ratio is a comparison of monthly debt payments with your monthly income before taxes. In other words, it’s how much debt you have in relation to how much you make.

Why’s this important? When submitting your loan application, lenders look at your DTI ratio to determine if you can keep up with payments. So, the lower your DTI, the better you look as a candidate.

To calculate your DTI ratio, start by adding up all your monthly debt payments. This includes student loans, car payments, credit card bills, alimony, child support, etc. When including credit card payments in your DTI calculation, most lenders use the minimum payment. Your DTI doesn’t include expenses like your utility bill or a gym membership.

Then divide the total debt payments by your gross monthly income (the amount of money you make before taxes and other deductions) and multiply by 100.

For example, if you owe $2,000 per month in debt payments and your pre-tax monthly income is $12,000, then divide 2,000 by 12,000. Multiply by 100, and you’ll get your DTI ratio. In this example, it would be 16.6%.

Monthly Debt Payments

Monthly Gross Income

DTI Ratio

Rent: $1,100

Student Loan: $550

Car Payment: $250

Credit Card: $100

Total: $2,000


$2,000/$12,000 X 100 = 16.6%

Note: These numbers are for illustration purposes only.

So, where should your DTI be? Generally, 35% or lower is considered a good DTI ratio for healthy finances. Each lender’s DTI criteria is going to be different depending on your financial situation and the amount you’re requesting.³

What Does Prequalifying Do for Me?

Prequalifying for a personal loan is often the first step in the loan approval process. It’s not a guarantee for a loan, but it can give you a general idea of how much you might be able to borrow and with what terms.

If you do try to prequalify, you’ll provide personal financial information, such as your income and how much you have in your bank accounts. A lender might also do a soft credit pull to ensure that you meet the minimum requirements. (Don’t worry, a soft credit pull won’t impact your credit score, it just gives lenders a sense of your creditworthiness.) Then, they’ll present you with potential loan terms.⁴

Depending on the situation and type of loan you want, you can often get prequalified online. It could take as little as a few minutes and give you a quick answer on a lending option.

Final Thoughts

Personal loans offer fast access to money with predictable terms. So, if you’re looking to make a smart refinancing move or fully enjoy a vacation or life event, a personal loan could be a great option for you. But before taking the plunge, make sure to do your homework.

If you don’t think you’ll qualify today, there are some easy steps you can take to improve your chances. Set some goals now to change your credit profile, and your loan future could be brighter.

Be sure to check out part two of this series about ways to improve your chances of qualifying for a personal loan.

Borrowing & CreditBanking 101