The Canadian Financial Capability Survey data showed that nearly 75% of Canadians had outstanding debt or used a payday loan in 2019. Although the most common type of debt is a mortgage, almost a third feel they have too much debt. One way to tackle debt is to take out a personal loan. This allows you to consolidate your payments into one monthly charge. However, you can use a personal loan for almost anything except college tuition, a home down payment, and business expenses. Yet when it comes time to apply for a loan, what are the personal loan requirements you’ll need to meet?
Keep reading to learn about the essential personal loan documentation you’ll need.
1. Credit Score and History
Your credit score is crucial when applying for a personal loan. Your credit score shows your creditworthiness or ability to repay your loan.
A low credit score tells lenders you’re a risky borrower. You may not be able to pay back your loan. Since a default will cost the lender money, they may refuse you. On the other hand, a high credit score shows you are a reliable lender and more likely to repay your loan on time.
Lenders will run a credit check during your application process to identify your score, even if you’re also asked to provide it to the lender as part of the application process.
Your credit history is also important because it shows how long you’ve maintained credit and your payment history.
There are several valid reasons you may have a lower-than-average credit score. For instance, if you took out loans to attend university abroad or have a mortgage.
For those with a lower credit score, your credit history becomes more important. Lenders want to see that you have established credit and have consistently made payments on time in the past.
Having a stellar history can help outweigh a less-than-favorable credit score.
If you’re worried about your credit score preventing you from getting a loan, consider no credit check loans from kingcash.ca. These online loans don’t use your credit score to determine your creditworthiness. Instead, they use your financial data for the future.
2. Stable Income
The next most important requirement is your income. Lenders want to see that you have a steady income to make your monthly payments. However, they also want to see how much you make so that you can actually afford your monthly expenses.
If you take home $4,000 a month, it will be hard to make $2,000 a month payments on top of your existing living expenses.
Yet, lenders often don’t disclose their minimum income requirements. This means you won’t know how much you qualify for at each lender until you submit an application and see how much you’re approved for.
To establish your income, lenders will often ask for some, or all, of the following documentation:
- Monthly bank statements
- Payment stubs
- Signed letters from employers
- Tax returns
Those who are self-employed should expect to provide slightly more documentation to verify sufficient income.
3. Debt-to-Income Ratio
One of the bank loan requirements many don’t consider is the debt-to-income (DTI) ratio. DTI is a percentage that represents the portion of your gross monthly income that goes toward paying debt. Gross monthly income is your income before taxes.
Lenders use DTI to identify your ability to make payments on a new loan on top of your existing debts.
How to Calculate Your DTI
To calculate your DTI, first, you need to add up your monthly bills. This includes:
- Rent or mortgage payment
- Child support payments
- Other loan payments, such as a car loan or student loans
- Credit card payments
- Other debt payments
Typically, you don’t need to include daily expenses such as groceries, utilities, or transportation.
Next, divide your total monthly expenses by your gross monthly income.
Of course, the lower your DTI, the better.
Generally, if your DTI is 36% or less, you have a decent amount of debt relative to your income. Thus, it’s easier to have financial stability, and you shouldn’t have a problem getting approved for a personal loan.
If your DTI is between 37-41%, you’re in the normal range of how much debt you have. While you should still be able to receive a personal loan, you may need to lower the amount of debt you have first. Reducing your debt could make it easier for you to get approved or land you a lower interest rate.
With a DTI between 42-50%, you’ll find it difficult, although not impossible, to find a lender. If you find a lender willing to work with you, expect to pay a higher interest rate. To avoid this, pay off as much debt as possible before taking out another loan.
Those with a DTI over 50% won’t be able to secure a personal loan. If you fall into this category, you should work to pay off your existing debt and improve your financial health instead of taking on more debt.
The loan requirements for a secured personal loan include pledging valuable assets or collateral to secure the loan. For a secured personal loan, you can use the following assets as collateral:
- Home, property, or other real estate
- Collectibles (i.e., coins, precious metals)
Because of the collateral, secured loans may have lower interest rates. But this is not always the case.
However, most personal loans are unsecured, so you don’t have to worry about this requirement. But remember, if you have an unsecured loan and stop making payments, your lender can sue you in court.
Do You Meet These Personal Loan Requirements?
To secure a personal loan, you will need to meet these standards. But what happens if you don’t meet all the personal loan requirements we discussed?
Head over to King Cash, where you can apply for a loan right now. We offer fast loans in Canada! You can qualify within a few minutes from the comfort of your home. So, what are you waiting for?
If you still have questions about how loans work at King Cash, don’t hesitate to send us a message.