Personal Loans: How to Improve Your Chances of Qualifying
Doing your homework and making a few changes can increase your chances of getting your loan approved.
This article is part two of a two-part series. Check out part one here.
Part One of our series covered the nuts and bolts of personal loans, from how they can be used to what lenders look for.
Personal loans offer flexible funding for just about anything, such as home renovation, large purchases, or consolidating debt. They also have fixed payments and predictable terms, making them easier to budget around.
In Part Two of our series, we’re ready to go over the factors that lenders consider when reviewing an application and discuss ways to increase your chances of qualifying.
When it comes to getting a personal loan approved and receiving a competitive interest rate, your credit score is a key factor.
If you’re concerned that you might not be approved for a personal loan, there are steps you can take to improve your chances, such as improving your debt-to-income ratio, reducing the amount you’re requesting, or adding a co-signer.
These improvements could not only increase your chances of getting approved for a loan, but also boost your overall financial well-being.
Give Your Credit Score a Boost
When it comes to getting a personal loan, the approval process may seem like a black box, especially because every lender has their own, proprietary underwriting process. It’s a safe bet, though, that most lenders use your credit score to determine your creditworthiness, as well as decide what offers to extend to you.
There are a few different bureaus that provide credit score data, with the most common being Equifax, TransUnion, and Experian. While each bureau has access to most of the same credit data on a person, it’s possible for one to have a mistake while the others don’t. It’s a good idea to check your credit report on a regular basis and correct any errors.
Since your credit score is a significant factor when applying for a personal loan, having a higher score generally correlates with improved chances for approval (and possibly a better interest rate). Let’s talk about some steps you can take to improve your score.
It’s generally a good idea to keep an eye on your credit report to make sure there aren’t any errors, such as closed accounts still being reported as active or accounts that you didn’t even open being attributed to you. (This can also be a sign of identity theft.)
Another way to improve your credit score is to have a history of on-time payments. If you’ve had issues staying on top of payments in the past, there’s no time like the present to establish this habit. Also, try to make more than the minimum monthly payment if you’re carrying a balance on credit cards. Not only will this save you in interest, it will also help your credit utilization ratio. Your credit utilization ratio is determined by dividing the amount of revolving credit you’re using by the total credit you have available.
Another thing you can do is avoid having several recent borrowing inquiries before applying for a personal loan. Multiple recent credit inquiries can negatively impact your credit score and make lenders think you’re trying to access more credit than you can pay back.
Up Your Approval Chances with a Low DTI Ratio
Lenders really like ratios and scores. In addition to your credit score, your debt-to-income (DTI) ratio also plays a large part in getting approved for a personal loan.
Your DTI ratio shows how much debt you have in relation to how much you make. Lenders use it as part of their calculation to determine if you are likely to keep up with payments. Generally, you want to have a DTI ratio of 35% or lower. The lower your ratio, the more likely lenders are to see you as qualified applicant. You can lower your debt-to-income ratio by reducing debt or increasing income.
Something to keep in mind - when you fully pay off a debt, your credit score might go down temporarily. This happens if removing debt affects the factors that make up your score, like your credit mix, credit history, or credit utilization ratio.¹
For example, if you pay off a car loan, the loan is closed once the final payment is made. Since the loan is no longer active, it will affect your credit mix and the average age of your accounts. According to Bankrate, credit scores usual recover from a closed account in about three months.² If you’re considering taking out a personal loan, try not to close any long-standing accounts right before applying.
Your savings doesn’t have an impact on your DTI ratio. If you have a DTI that is too high for your lender to approve, using some of your savings to reduce outstanding debts and lower your DTI ratio could improve your approval chances.
Consider a Co-signer
If you’re looking for a more near-term solution to getting your loan approved, you may want to add a co-signer to your personal loan application.
A co-signer is a person that you can add to your application who the lender will also consider as an applicant and makes them equally responsible for repaying the loan. This means if the original borrower is unable to make the payments, the co-signer is responsible for making those payments.
If you add a co-signer, consider looking for someone with a better credit score than you to improve your chances. Not all loan applications will allow you to have a co-signer, so be sure to check with your lender if you’re looking to add one.
Ask for Less
Lenders want to make sure borrowers can pay their loans back. Therefore, it’s important to only request as much money as you can reasonably pay back. Your income, current liabilities, and other factors all go into how much a lender will approve you for.
Instead of shooting for the moon, think about what you’re going to use the money for and request an amount that will cover those expenses and won’t be more than a lender can reasonably expect you to pay back. Since smaller loan amounts typically translate into smaller monthly payments, lenders tend to have more confidence that you’ll be able to repay these amounts.
Credit score, DTI ratio, and the loan amount all play a large role in loan approval. If you’ve done your homework on eligibility, the next step is to find the right lender.
Shop around and compare options, keeping interest rates, Annual Percentage Rates (APR), and fees in mind. (Quick reminder: interest rates are expressed as a percentage and refers to the amount you’ll be charged to borrow the money. APR is also expressed as a percentage, but it combines the interest rate with any fees associated with the loan.)
While some banks have fees for things like applications, originating the loan, or being late on a payment, other banks don’t charge these fees. (Psst, Jenius Bank isn’t planning on charging our customers these fees on personal loans.)