Loan Requirement for a Personal Bank Loan
- Before processing a personal loan application for a prospective borrower, the lender must first establish the identity of the borrower. The USA Patriot Act requires new customers, including loan applicants, to provide the bank a valid form of government-issued identification such as a passport or driver's license. The applicant must also provide the lender her Social Security number, date of birth and physical address. The lender pulls credit reports to verify the borrower and view the borrower's credit history.
- Many banks restrict the amount of unsecured debt that any borrower can obtain. This limit often amounts to $50,000 or $100,000 and includes all personal loans, credit cards and unsecured revolving credit lines. Loan limits are further restricted by the borrower's income. Generally, banks do not approve loans if the borrower's debt payments exceed 40 or 50 percent of the borrower's monthly income. Furthermore, people with credit scores below 640 are usually ineligible for unsecured debt. Only people with scores above 700 can obtain unsecured personal loans with high balances.
- Loan applicants must provide the lender with two years of tax returns, two years of W2 forms and two recent pay slips. Lenders normally contact the applicant's employer to verify that the employee still works for the company before approving the loan.
Self-employed persons must also provide two years of business tax returns. Retired persons must provide evidence of retirement income. The lender deducts the monthly debt payments shown on the credit report from the borrower's verifiable income to determine the debt-to-income ratio. DTI and credit score ultimately determine the loan amount. - Unsecured personal loans have higher interest rates than other types of loans because the lack of collateral exposes the lender to a greater degree of risk. However, many banks offer secured personal loans such as certificate of deposit secured loans. These loans have lower rates because the borrower opens the CD at the bank they intend to borrow the money from. If the borrower defaults, the lender liquidates the CD and uses the proceeds to settle the debt.
