How to boost your chances of getting approved for a personal loan
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Whether you need to finance a big purchase or pay for an emergency expense, personal loans can be a great way to help you cover the costs. But getting approved with the most favorable terms and interest rates can be tricky, especially if you have less-than-stellar credit.
Luckily, there are strategies that can help you increase your chances of approval.
Strategies to increase your chances of getting a personal loan
Personal loans can help you cover a wide variety of expenses, from emergency car repairs to home improvement projects. Although each lender has its own eligibility requirements, you’ll typically need good credit and a stable source of income to get approved for the loan.
That said, there are certain strategies that can increase your chances of approval, in addition to helping you secure the best terms and interest rates for your situation.
Work on your credit score
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 it’s important to keep it in good shape before you apply.
- 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.
Run the numbers and borrow only what you can afford
When you apply for a loan, it’s possible to get approved for a higher amount than the one you initially requested. That said, going over budget can have serious consequences, especially if your financial circumstances change and you can no longer take care of your monthly bill.
When crunching 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.
Find a co-signer
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 co-signer. A co-signer 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.
Check out more than one lender
Each lender has its own set of requirements for loan approval. By prequalifying with multiple lenders instead of settling for the first one you see, you’re not only increasing your chances of getting a loan but also of getting 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 lower the cost of your loan.
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 score and 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.
- Collateral: If you need to borrow a large amount, lenders may ask you to provide collateral.