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Personal loans are one of the most flexible credit products in the market that can be used to cover almost any expense. But if you have a limited credit history or less-than-perfect credit, getting approved for one can be tricky.
If you’re in the market for a personal loan but aren’t sure if your credit or financials will make the cut, follow these steps to increase your chances of approval.
5 steps to increase your chances of getting approved for a personal loan
Although each lender has its own eligibility criteria, following these steps can significantly increase your odds of approval.
1. Give your credit a little boost
Your credit score plays a crucial role when it comes to loan approval and it will also inform how much interest you’ll pay. That’s why the higher, the better. Here’s how to make sure your credit makes the cut:
- Review your credit report: The Federal Trade Commission found that 5 percent of Americans have errors in their credit report. Before applying for any credit product, request a copy of your credit report to see if everything is accurate. It may take up to 30 days for the bureau to respond and for the error to be corrected on your report, so check early.
- Make on-time payments: Your payment history is key to keeping a good credit score, as this makes up 35 percent of your score. That’s why it’s important to stay on top of your bills or contact any creditors if you’re having trouble making payments, to ensure your payment history stays in mint condition.
- Pay down revolving balances: Misused credit cards can have a serious negative impact on your credit score. Experts recommend not using more than 30 percent of your total available credit to keep the portion of your score affected by it as high as possible.
- Avoid opening or closing accounts: Whenever you apply for a new credit product or close an existing account, your credit score drops temporarily by a few points. When thinking about applying for a personal loan, avoid making any sudden changes to your accounts that could affect your credit.
2. Determine how much you need
Personal loans are a type of installment loan, so they are issued for a lump sum. Before applying for a loan, crunch the numbers to see how much you need. Likewise, make sure that you only borrow what you can afford, as going over budget could turn into a financial headache in the future.
When running numbers, make sure to account for the following:
- Interest rate: Interest rates for personal loans can range from around 6 percent to 36 percent, depending on your credit and other factors. Compare offers from multiple lenders to ensure you get the lowest rate.
- Loan term: Loan terms for personal loans typically range from two to seven years. While longer repayment periods will reduce your monthly payment, you’ll end up paying more in interest over the life of the loan.
- Fees: Some lenders will charge origination fees and prepayment penalties, in addition to late payment fees and returned check fees. Not every lender will charge every fee, so narrow your search by eliminating more fee-heavy providers.
3. Add a cosigner
If you don’t have a good credit score or if your income is on the lower end, try applying for a loan using a cosigner. A cosigner is any individual who agrees to be equally responsible for your loan. This means they are required to make payments if you don’t.
For this to improve your chances of approval you must choose someone that has good credit and sufficient income, as the lender will take into account these factors as part of your application. Likewise, it’s best to pick someone you trust, such as a close friend or a family member.
4. Don’t settle for the first lender that comes your way
Each lender has its own set of requirements for loan approval. By prequalifying with multiple lenders, you’re increasing your chances of getting a loan and the best offer.
Most personal loan lenders offer prequalification with a soft credit inquiry, which doesn’t impact your credit score. When comparing offers pay close attention to the annual percentage rate (APR), which includes both your interest rate and the lender’s administrative fees, to understand the overall cost of the loan. Additionally, try looking for lenders that offer discounts or any other perks that can make your loan more affordable.
5. Double and triple check your application
Once you choose a lender and fill out the application, make sure you review all of the information provided carefully. Doing this is key to getting approved for a loan, as omitting details or providing incorrect information could get your application denied.
Factors that influence personal loan approval
When applying for a personal loan, lenders will check the following to determine whether it’s in their best interest to lend you money:
- Credit history: Lenders check your credit report to determine how risky of a borrower you may be. The better your credit score and history, the better your chances of approval.
- Income: Lenders check your income to determine your ability to repay the loan.
- Debt-to-income ratio: This ratio compares your monthly debt payments to your monthly income. Lenders use it to determine how much you can afford to borrow.
- Loan amount: If you need to borrow a large sum, lenders may ask for collateral to approve you for the loan.
After reviewing the steps above, if you’re ready to apply for a personal loan you can check rates and compare lender features by reviewing Bankrate’s curated list of lenders.