Applying for and then getting approved for a personal loan can often seem like a daunting task, given the strict criteria that need to be met. Before applying for a loan, it’s best to understand the requirements that you’ll need to meet to avoid unpleasant surprises or delays. Read on to find out how to qualify for a personal loan.
Key Points
- Personal loan requirements typically include a good credit score, steady income, low debt-to-income ratio, and proof of identity and residency.
- To improve your chances of loan approval, post collateral, get a cosigner, or reduce your debt-to-income ratio.
- Banks tend to have strict loan criteria, while alternative lenders have less stringent requirements.
How To Get Approved For A Personal Loan: General Requirements
While specific personal loan requirements vary by lender, certain criteria are almost always evaluated when lenders review loan applications. Get familiar with the following common loan criteria before you apply for a personal loan:
Credit Score
Your credit score is among the most important factors lenders look at when reviewing your loan application. In Canada, credit scores range from 300 to 900. The closer you are to 900, the higher your chances of loan approval.
Generally speaking, lenders require a minimum score of 660, depending on other factors, such as income and collateral. To take advantage of the lowest interest rates and most favourable loan terms, a score of at least 720 is best.
That said, some lenders may allow credit scores much lower than this, though the interest rates charged on bad credit loans are much higher.
| Note: You can quickly check your credit score for free using Loans Canada’s CompareHub tool. |
Learn more: What Credit Score Is Needed For A Personal Loan?
Income
Your income level is another crucial component of your loan application. Lenders will require specific minimums when it comes to income needed for loan approval. Generally speaking, minimum income requirements can range from $1,000 to $1,500, though they may be higher for certain lenders.
That said, meeting the minimum income threshold does not guarantee loan approval; it simply means you’re eligible for a loan application. The exact income level needed will depend on many things, like the loan amount you’re applying for, and your assets and debts, to make sure you earn enough to cover your personal loan payments, as well as all other debts you carry.
Employment
While income requirements may vary quite a bit among lenders, the key is to have a steady job and a reliable income. More specifically, lenders typically require applicants to be employed for at least 3 to 6 months before applying for a loan. This demonstrates employment stability. You’ll need proof, such as a paystub.
| Note: Most lenders may require income from a job, but some may accept non-employment income sources, such as government benefits or pensions. As long as the source of income is stable and sufficient, you may qualify. |
Debt-To-Income Ratios
Not only is your income important when applying for a personal loan, but so is your debt load. More specifically, your debt-to-income ratio — which is a measure of how much of your gross income you spend on bill payments — will be assessed. Your debt-to-income ratio should be no higher than 44%; any higher than that could hinder your ability to get approved for the personal loan you want.
If a large percentage of your income is already devoted to debt repayment, you may have some difficulty getting approved, and should consider paying down some of your other debts before applying for a new personal loan.
Learn more: What Is Debt-To-Income Ratio And How To Calculate It?
Borrow Up To $50,000
Are Personal Loan Requirements For Bad Credit Loans The Same?
Not all lenders have the same requirements, particularly bad-credit lenders. Compared to banks and other traditional lenders, bad credit lenders put less emphasis on your credit score and more on your overall financial situation.
Even if you have bad credit, you may still qualify if you meet their minimum income threshold, even if you have non-traditional sources of income like pensions or government benefits.
Similarly, they may rely on alternative sources of information, such as a credit reference or a number of NSF charges on your bank statements.
Learn more: Personal Loan Eligibility Requirements For Bad Credit Lenders
Personal Loan Documents You Need To Get Approved
In order to be approved for a personal loan, you may need to provide certain documents along with your application in order to verify your information. Here are some documents you may require:
Personal Documents
| Proof Of Identity | Your lender will want to verify your identity and ensure you’re a Canadian citizen or permanent resident and currently reside in Canada. Your lender may ask for: – Driver’s license or passport – Social Insurance Number (SIN) – Birth certificate – Certificate of Citizenship |
| Proof Of Address | Your lender may ask for utility/bank bills or a lease agreement to further verify your address. |
Income And Employment Documents
Even if you specified how much you earn in your loan application, the lender will still want to see tangible evidence of such earnings.
| Proof Of Income | The lender may ask to see the following documents to prove your income: – Pay stubs – Bank statements – Tax returns (if you’re self-employed) |
| Proof Of Employment | In addition to your income, the lender may also want to find out what your status at work is. Ideally, you should be employed full-time and have maintained your position for a certain period of time. To verify your employment, the lender may request a letter from your employer. |
Financial Documents
| Documents For Funding | For loan funding and repayment, lenders will ask for a direct deposit form (void cheque) or your email address for e-transfers. |
| Other Documents | Other paperwork may also be requested to ensure your finances and credit are solid, as well as for miscellaneous purposes: – Statement of assets – Statement of liabilities – Mortgage or rent statement – Additional sources of income (such as investment dividends or rent collected from investment properties) |
Instant Bank Verification (IBV)
You may be able to skip all the handling of paperwork and documents to submit if the lender uses instant bank verification. This digital process allows lenders to securely access your bank statements in real time. It helps confirm your identity, income, and account details quickly and securely, which can speed up the loan approval process and help you get your hands on the borrowed funds sooner.
Other Things That May Help You Get Approved For A Personal Loan
To maximize your chances of approval at an affordable rate, check out these tips to increase the odds of qualifying for a personal loan:
1. Provide Collateral
Lenders look at several factors to determine your risk as a borrower. Collateralizing your loan will reduce the lender’s risk, which can increase your chances of personal loan approval with better terms and lower rates. If you ever default on the loan at some point, the lender can repossess the collateral and sell it to recoup the funds you failed to repay.
You can use assets such as your home, car, investments, and any other item that has a lot of value and can be easily resold in the event of default.
2. Add A Cosigner
If you don’t have an asset of value to secure the loan, consider adding a cosigner to boost your chances of loan approval. A cosigner is someone with good credit and a strong income who agrees to take over loan payments in case you fail to keep up with them.
3. Apply With An Online Lender
Alternative online lenders have less stringent lending criteria compared to banks. They rely less on credit scores and put more emphasis on other factors such as income, employment stability and DTI ratio.
If you have bad credit or weak finances, you’ll have greater chances of qualifying for a personal loan with an alternative lender. Just keep in mind that a loan from alternative lending sources will come with higher rates and be more expensive overall.
That said, applying for a personal loan online instead of in-person has its perks:
- Approval and funding with many online lenders is completed within 24 hours. Meaning you can get your funds the same day.
- Many lenders allow you to apply anytime, including weekends and outside business hours.
4. Get Pre-Approved And Compare Options
Before you officially apply for a personal loan, consider getting pre-approved first. This will help you find out if your finances and credit health meet the lender’s requirements. Moreover, getting pre-approved will give you a clear idea of what type of loan you can get and will help you avoid unnecessary application rejection and hard credit inquiries.
To get pre-approved, you’ll need to provide lenders with information about your income, employment, and assets. Based on this information, you’ll receive offers on different loans, which you can then compare side by side to see where the best options are. Using an online comparison tool will make comparing loan options quick, easy, and convenient.
Tips To Remember Before Applying For A Personal Loan
Consider these tips before taking out a personal loan:
Apply Based On Your Qualifications
Generally, lenders will have base requirements in relation to the borrower’s credit scores, income, and debt-to-income ratio. Be sure to ask your potential lender about these requirements prior to applying. This will save you from potential rejections and unnecessary hard inquiries.
Gather Documents Early
Once you’re ready to proceed with an official loan application, you’ll need to provide the lender with specific documents that they’ll use to verify your identity and financial health, as listed above.
Keep in mind that any inaccuracies on your loan application and missed documents will prolong the approval process and may even risk loan rejection. Double check any forms you fill out for errors.
Understand Your Finances
Before you apply for a loan, be sure to pull your credit report to see what your credit score is. Your score will influence your ability to qualify for a personal loan, so make sure it’s high enough to meet the lender’s criteria. You can check your credit score for free using Loans Canada’s CompareHub.
It’s also important to assess how much you need to borrow. The higher the loan amount, the more you’ll have to pay back, plus interest. Make sure you’ve carefully assessed exactly how much you need to borrow so you apply only for what’s required.
Avoid On Your Personal Loan Application
When applying for a personal loan, avoid common mistakes, like the following, that could hurt your chances of approval or result in high rates or unfavourable terms:
- Providing inaccurate or incomplete information: Lenders will verify your details when you apply, and if there are any discrepancies, this can result in loan rejection.
- Not checking your credit report: Failing to check your credit report beforehand without checking for and disputing errors that impact your credit score can unfairly sabotage your eligibility for a loan.
- Applying for multiple loans at once: Submitting too many loan applications at the same time can lower your credit score and signal financial distress to lenders.
Learn more: Have You Made These Mistakes On A Personal Loan Application?
Bottom Line
Meeting personal loan requirements comes down to having strong credit, steady income, and manageable debt. Each lender’s criteria may vary, so it’s important to check what these requirements are before you apply. When properly prepared, you can boost your chances of loan approval and secure better loan terms.
