In recent years, a growing number of borrowers have turned to personal loans to consolidate debt or help fund a major purchase. Fortunately, if you want to apply for a personal loan, it’s typically less of a hassle than qualifying for other types of loans.
Here are the documents you typically need in order to apply for a personal loan:
When you apply for a personal loan, the lender will simply ask you to fill out an application that asks questions about your assets and liabilities, income and expenses, says Linda Jacob, a Certified Financial Planner and financial counselor at Consumer Credit of Des Moines in Iowa.
The application likely will request permission for the lender to pull information about you from a credit reporting agency so the lender can determine your credit history and credit score.
“Most lenders will also require proof of income, either a current pay stub or a tax return,” Jacob says.
In some cases, documentation for a personal loan might be more extensive. For example, if you are self-employed, some lenders might require more detailed records, such as a couple of years of audited financials to prove your income.
Still, applying for a personal loan should be less of a headache than applying for other types of loans – such as a home mortgage.
“When applying for a mortgage, there are many more documents required than (for) a simple personal loan,” says Jacob, who also wrote the book “No More Paycheck to Paycheck.”
Here’s a breakdown of the typical documents required to apply for a personal loan:
- Employment and income information
- Bank account information and bank statements
- Credit report
- Collateral (in some cases)
Easier application, higher interest rate
Of course, there is a downside to the relative lack of documentation associated with a personal loan application: You will likely pay a higher interest rate on your personal loan than you would on a mortgage.
In fact, applying for a personal loan closely mirrors the circumstances a borrower encounters when applying for a credit card. Little documentation is required in that either case.
“You can simply apply right at the cash register at your favorite store or online,” Jacob says. “All that is required is a simple application.”
However, because both personal loans and credit cards are unsecured loans – meaning they are not backed by collateral – the lender takes on a lot of extra risk. And you will be charged more to compensate for that risk.
“That credit card comes with a high interest rate — usually in the 20% to 27% range,” Jacob says.
Personal loan rates typically are not quite that high, but often reach into the double digits.
Approving your chances of being approved for a personal loan
To boost your odds of being approved for a personal loan, make sure you are prepared. Doing your homework gives yourself the best chance of landing your loan.
For starters, look at your credit reports so you can spot any errors and correct them by notifying the relevant credit reporting agency — Experian, Equifax or TransUnion — and explaining what is wrong with the information.
It also helps to know your credit score. This will give you a better sense of your odds of being approved, and whether your score is high enough to qualify you for the best rates and terms.
As Experian notes, every lender will check both your credit report and your credit score before approving a personal loan.
Also, keep important documents — such as your tax return, pay stubs and bank statements — in a drawer or file cabinet so that they are easily accessible.
“Being able to get your hands immediately on any documents that the lender requires will make the application process much smoother, and a lot less stressful,” Jacob says.
Your loan officer might have to take your request to a lending committee. So, try to be helpful.
“Make sure he or she is fully prepared to prove that you are an excellent risk and that you deserve the best interest rate,” Jacob says.