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Personal Loans: What Are They and Do You Qualify?

Personal Loans: What Are They and Do You Qualify?

Jenius Bank Team
Updated 3/5/2025
• Originally Published 4/4/2023
Borrowing & CreditBanking 101
A woman sitting on the ground with a laptop.
A personal loan could 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!) Or perhaps you want to pay off your credit card debt. Or it could be that a sudden injury has left you with a pricey medical bill. Enter: the personal loan.Every year, millions of Americans seek personal loans to cover expenses for access to quick cash and flexible funding. But before you start submitting applications, you need to know how these loans work. Let’s look at the details.

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 factors considered.
  • Prequalifying for a personal loan makes it easier to compare offers, often without affecting your credit score.

What Is a Personal Loan?

A personal loan is money you borrow from a bank or other financial 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. The higher your credit score is, the more likely you are to get approved.The money may be used for just about any purpose, meaning you could use a personal loan to consolidate debt, pay for an emergency car repair, fix your roof after a windstorm, and more. These loans typically have lower rates than credit cards and other short-term loans, making them a great choice for saving on interest.

How Personal Loans Work

Personal loans are typically issued as a lump sum payment, meaning you receive the proceeds in a single deposit from the lender after your application is approved. Most lenders deposit the funds directly to your bank account within a few days of approval. Once you accept the loan and receive the funds, you need to start making payments to the lender. Your loan’s terms detail the payment amount and frequency. If you have questions, don’t hesitate to reach out to your lender.1

How to Qualify for a Personal Loan

Though each lender’s requirements are slightly different, there are a few things that all lenders look for when reviewing personal loan applications. Here’s what you may need to qualify for a personal loan.

A Good Credit Score

Lenders prefer working with borrowers who have good to excellent credit scores. 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.2Check your credit score online through your bank, credit card issuers, or other services.

A Positive Payment History

Did you know a single late payment stays on your credit report for up to seven years?3 Lenders review your payment history to check your track record of making on-time payments. And since your payment history makes up 35% of your FICO score and 40% of your VantageScore, making on-time payments each month for your credit cards and other debts is key.Remember, lenders prefer working with responsible borrowers who are likely to make on-time payments. If your payment history is less than stellar, lenders may still offer you a loan, but it may have a higher rate.

Proof of Reliable Income

Specific income requirements vary, but lenders want to make sure you’re able to cover your loan payments, as well as your current obligations.Lenders often accept the following as proof of income.
  • Recent tax returns
  • Bank statements
  • Pay stubs
  • Signed salary letters from employers
If you’re a freelancer 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 is this important? When submitting your loan application, lenders look at your DTI ratio to determine if you’re able to keep up with payments. So, the lower your DTI, the better you look as a candidate. Generally, 35% or lower is considered a good DTI ratio for healthy finances,4 but each lender’s DTI criteria is going to be different depending on your financial situation and the amount you’re requesting.

Get Prequalified for the Personal Loan

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 may give you a general idea of how much you might be able to borrow and the terms. Many lenders allow you to prequalify online, but it’s always a good idea to check with each lender to learn more about their process. Prequalifying involves providing 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 (aka, a soft credit inquiry) to ensure that you meet the minimum requirements. Don’t worry, a soft credit pull won’t impact your credit score. These types of inquiries just give lenders a sense of your creditworthiness. Using this information, they present you with potential loan terms. Compare your prequalified offers based on their rates, loan length, and requirements, and choose the one that best aligns with your needs.

Are Personal Loans Good to Apply For?

There are dozens of myths about personal loans, and if you don’t understand how they work, it may seem like a questionable idea. Of course, applying for a personal loan is a, well, personal decision. The loans in and of themselves are neither good nor bad. They may be used to pay for many different things. But that doesn’t mean applying for one is right for everyone. Before applying, it’s important to think about how a new loan could impact your finances. If you’re confident in your ability to repay the loan in full without putting a strain on your monthly budget, applying for one may be a good choice. But if you think the extra debt of a new purchase could make your financial situation tight, saving up for the purchase might be a better choice.5Also, anytime you consider new debt, it’s important to think about the impact of that debt on your credit score. For example, adding debt to your credit report could change one of the ratios (e.g., credit utilization ratio) that is used to calculate your score

Final Thoughts

Personal loans often offer fast access to money with predictable terms. So, if you’re looking to make a smart refinancing move, enjoy a vacation, or cover a major expense, 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 could take to possibly improve your chances. Set some goals now to change your credit profile, and your loan future could be brighter. Learn more about Jenius Bank personal loans, and how they could help you borrow smarter.