What Documents Are Required for a Personal Loan?

Loan applicants are expected to produce documents to confirm their identity, their employment status, and their address. Lenders respond with documents of their own to outline their terms and conditions.

The information provided in this article is specific to “personal loans.” The loan documents required for business loans or mortgages, except for documents used for identification, will be different than what’s listed here. The documentation we’ve included below is what you can expect to see when taking out a secured or unsecured personal loan.

What are “loan documents” and why are they needed?

Personal loan documents are required by the lender even when the application and approval process are done online. “Loan documents” don’t need to be in physical paper form. In today’s banking world, they’re typically digital, though either the lender or the borrower might print them out to archive as a hard copy.

Why are loan documents needed? Everything in banking needs to be documented. There are regulations and laws governing the industry. One of these is the “Truth in Lending Act” (TILA) which requires lenders to disclose information about all fees associated with a loan. That disclosure comes in the form of a document provided to the borrower.

Another law the banking industry is bound by is the “Fair Credit Reporting Act” (FCRA) which has been revised several times. This law mandates the accuracy and privacy of information reported to the credit bureaus. According to the Truth in Lending Act, lenders are legally required to provide documentation of borrower rights when the loan agreement is signed.

These are just a few of the reasons why personal loan documents are needed. Another is the obvious one. A “loan agreement” should be written out and signed by both parties. Repayment terms, like an ACH direct debit agreement, fall in this category too. The documentation protects both parties if a dispute arises in the future.

What loan documents do I need to apply for a personal loan?

A personal loan application has fields asking for the full name, contact information, date of birth, and social security number of the loan applicant. These are all questions that establish the identity of the applicant. You can provide proof of identity with a state ID/Driver’s License, a military ID, or a passport.

Some lenders also accept a birth certificate, certificate of citizenship, or social security card as proof of identity, but these are non-photo IDs. They’ll also expect “Proof of Income” and “Proof of Address” before granting final loan approval. Here’s what you need for that:

Proof of Income Loan Documents

•   Pay Stubs
•   W2s and 1099s
•   Tax Returns
•   Bank Statements
•   Employer Contact Info

Proof of Address Loan Documents

•   Utility Bills
•   Rental Agreement
•   Mortgage Statement
•   Proof of home or auto insurance
•   Bank or credit card statement
•   Voter registration card
•   Property tax receipt

This may seem excessive to you, but lenders need to protect themselves by verifying your identity, address, and financial history. W2s and 1099s show how much money you made last year. Tax returns show how many years you’ve been employed. Bank statements and utility bills prove that you’re established somewhere.

Personal Loan Terminology You Might Hear

Reading through each document in the personal loan process can be tedious and time-consuming. Far too many borrowers “skip to the end” and simply sign documents because they are overwhelmed or get confused by unfamiliar terminology. We’ve compiled a list of some of that terminology with definitions to help you out with that.

• Amortization: Each payment that you make on your loan will be split between principal and interest. In the beginning, most of it goes towards interest. The exact breakdown of each payment is listed on an “amortization schedule.”
• Annual Percentage Rate (APR): APR is often confused with interest rate. They are not the same. The APR includes the interest rate, but it also includes fees on the loan that the lender charges. Think of it as the “total cost” of the loan.
• Collateral: This term is used to describe an asset put up by the borrower to secure a loan. Examples of this are the house in a mortgage loan or the car in an auto loan. Most personal loans are unsecured, so this may not apply.
• Credit Report: Three main credit reporting agencies provide borrower information to lenders. They are Experian, Equifax, and TransUnion. One or all of them may be used to determine your creditworthiness when you apply for a personal loan.
• Credit Score: Your credit score is one of the ways an institution can measure the risk of lending you money. The most common scoring model used by lenders is FICO®. Their scores range from 300 to 850.
• Debt Consolidation: You may see this term when you’re searching for a lender. Personal loans are often used to consolidate several credit card debts into a single debt that can be paid off with fixed monthly installment payments.
• Debt-to-Income Ratio (DTI): This is a key metric used by lenders to assess whether you can afford to repay a personal loan. It’s calculated by dividing the total of your monthly debt payments by your monthly gross income.
• Fixed Interest Rate: Most personal loans are unsecured installment loans that are paid back with payments that are the same amount every month (fixed). The interest rate must be fixed for the entire term of the loan for that to happen.
• Gross Income: Your gross income is the amount of money you make before taxes or deductions are taken out of your paycheck. The remainder after those taxes and deductions is called your “net income.” This is an important distinction.
• Origination Fee: Lenders sometimes charge an “origination fee” for setting up a personal loan. Search your loan documents carefully for this term because it could be a hidden cost that makes the loan more expensive.
• Payment Term: The “payment term” of the loan is the number of months the borrower is given to repay the loan. Selecting a shorter payment term could mean higher monthly payments, but the loan would get paid off faster.
• Prepayment Penalty: This is another one of those “hidden costs” you should be aware of. Some lenders charge extra if you want to pay off your loan early. This “prepayment penalty” can often offset what you might save by doing that.
• Principal: The “principal” of the loan is how much you borrow. It’s also the amount you still owe on that loan minus interest and fees. If you make extra payments during the life of your loan, make sure they’re “principal-only” payments.
• Secured Loan: We covered this briefly in the definition of “collateral.” A secured loan is a loan that the borrower needs to “secure” by posting an asset of equal or higher value. An “unsecured loan” does not require collateral.
• Underwriting: This is simply the process used to determine the creditworthiness of the prospective borrower. Underwriting could be done internally at the lending institution or performed by a third party designated by the lender.
• Variable Interest Rate: Most personal loans are fixed-rate installment loans. Variable interest rates change whenever the prime rate or federal funds rate changes. They’re more common with lines of credit than with loans.

The Bottom Line

Get organized before you apply for a personal loan because the lender will likely ask you for the documents we’ve listed here. Find your tax returns, W2s, and 1099s. Make a copy of your utility bills and rental agreements. Go through the list above and make sure you have everything you need.