What lenders look at when you apply for a personal loan

Credit history and credit score

Most lenders review your credit reports and a credit score. Each lender sets its own cutoffs and pricing, so there is no single number that guarantees approval everywhere.

FICO publishes the approximate weight of the main factors in its scores: payment history counts most, followed by how much of your available credit you are using, the length of your credit history, new credit, and the mix of credit types. Paying on time and keeping card balances low are the two habits that matter most.

Income and employment

Lenders want evidence that you can repay. They may ask for recent pay stubs, tax returns or bank statements, and some verify your employer. Steady income generally helps, although the documents required and the way income is assessed vary by lender.

Debt-to-income ratio

Your debt-to-income ratio, or DTI, compares your monthly debt payments with your gross monthly income. To calculate it, add up your monthly debt payments, such as rent or mortgage, car loan, student loan and minimum card payments, then divide by your income before taxes.

For example, $1,500 of monthly debt payments on a $5,000 monthly income is a DTI of 30%. Lenders set their own limits, but a lower ratio is generally viewed more favorably because it suggests you have room in your budget for a new payment.

The loan itself

• Amount: a request that is large compared with your income is riskier for the lender.
• Term: longer terms mean smaller payments but more total interest.
• Purpose: some lenders restrict certain uses, so check the lender's rules if you are borrowing for something specific.
• Security: secured loans are backed by an asset, which can change both approval odds and pricing but puts that asset at risk if you stop paying.

Prequalification vs. a full application

Many lenders let you prequalify, which usually uses a soft credit inquiry. A soft inquiry does not affect your credit score, and it gives you an estimate of the terms you might get. Prequalification is not a guarantee.

A full application usually triggers a hard inquiry, which can lower your score by a small amount for a while. When you are shopping for the same kind of loan, scoring models often treat several inquiries made within a short window as a single event. The length of that window depends on the scoring model, commonly somewhere between about two weeks and 45 days, so it makes sense to do your comparison shopping in a compact stretch of time.

What you can do before you apply

1. Get your free credit reports at AnnualCreditReport.com, the official site, and look for mistakes. Dispute any errors with the credit bureau.
2. Pay down credit card balances if you can. Lower utilization can help your score.
3. Avoid opening other new credit accounts right before you apply.
4. Calculate your DTI so you know where you stand.
5. Gather income documents so you are ready if a lender asks for them.