How to Improve Personal Loan Applications: 6 Ways to Increase Chances of Approval
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Personal loans can help cover a variety of unexpected projects and costs. The best way to get approved is to have good credit and a low debt-to-income ratio (DTI).
If you need a loan, these six tips can help improve your Personal loan apply and increase your chances of being approved for the funds you need.
Shopping around and comparing lenders is a good place to start before submitting an official personal loan application. Credible, it’s easy to view your prequalified personal loan rates from various lenders, all in one place.
1. Decide what type of personal loan you need
Personal loans are installment loans, which means you receive a lump sum of money up front and then repay the loan with fixed payments over an agreed term. But not all personal loans are created equal. There are many types of personal loans you can choose from, including:
- Unsecured loans — These loans allow you to borrow money without putting anything as collateral to secure them. In most cases, you will need a higher credit score to be approved.
- Secured Loans — Secured loans require you to provide an asset as collateral, such as your home or car. If you default on a secured loan, the lender has the right to seize your collateral.
- Fixed rate loans — Fixed rate loans come with a fixed interest rate that does not change for the term of the loan. These loans make it easier for you to budget for your payments.
- Variable rate loans — Variable rate loans have variable interest rates, which fluctuate with the market. Since these rates can go up or down, variable rate loans often bring uncertainty and can be difficult to budget for.
- Co-signed loans — Co-signed loans are personal loans that you take out with a co-signer, such as a family member or close friend, who agrees to repay the loan in the event of default. If you can’t qualify for a personal loan on your own or want a lower rate, co-signed loans might be worth pursuing.
- Joint loans — Joint loans can also increase your chances of getting loan approval and a better rate. These loans are very similar to co-signed loans, except that both borrowers can use the funds and are equally responsible for repaying them.
- Debt consolidation loans — A debt consolidation loan combines multiple high-interest debts into one easy-to-manage loan. These loans can simplify the process of paying off debt and potentially save you money on interest since personal loans usually come with lower interest rates than credit cards.
- Financing Buy now, pay later — With buy now, pay later financing, you can split online or in-store purchases into interest-free payments. You can use this type of loan to buy something right away with a minimal initial investment. But if you make a late payment, you may be subject to charges.
- Payday loans — Payday loans are small, short-term loans that can help you wait for your next paycheck. You will repay them within two to four weeks. But you should only consider payday loans as a last resort. They come with fees and interest that equates to an APR of 400% or more, according to the Consumer Financial Protection Bureau.
2. Check your credit report
Your credit score is a three-digit number that gives lenders an idea of how likely you are to repay the money you borrow. It is calculated based on your payment history, the number of accounts you have, the type of accounts, your credit usage (how much credit you use compared to the amount of available credit you have) and the duration of your credit history.
Lenders look at your credit score when they review your loan application. A higher credit score generally increases your chances of being approved and getting a better interest rate. By making payments on time and limiting the use of your credit, you can increase your score.
It’s a good idea to pull your credit reports from the three major credit bureaus at least once a year – you can do this for free by visiting AnnualCreditReport.com. Once you receive your reports, review them for potential errors, such as missed payments you didn’t actually miss or accounts you didn’t open. Dispute any errors you find with the appropriate credit reporting agency.
Visit Credible for compare personal loan rates from various lenders, without affecting your credit.
3. Improve your credit score
If you have a fair or bad credit scoreHere are some things you can do to increase your score and increase your chances of getting approved for a personal loan:
- Pay your bills on time. Even one missed payment can hurt your credit score. That’s why it’s important to pay your mortgage, credit cards, car loans, student loans and other bills on time, every time.
- Pay off your debt. The lower your credit utilization ratio, the more likely a lender will approve you for a loan. By paying off your debt, you can improve your credit utilization ratio and, therefore, increase your credit score.
- Do not close credit card accounts. Even if you no longer use certain credit cards, keep them open. It can increase the length of your credit history, which can improve your credit.
- Limit new credit accounts. Only apply for new credit when you absolutely need it. Applying for too many credit accounts at once can hurt your credit score because it leads to difficult inquiries on your credit report and lowers the average age of your credit accounts.
4. Don’t borrow more than you need
While it can be tempting to ask for more money than you need to meet a financial goal, like a car repair or a kitchen renovation, it can do more harm than good. Since a larger personal loan will come with a higher monthly payment and affect your ability to cover other financial obligations, lenders will consider it riskier. This can make it harder for you to get approved for a loan.
5. Consider applying with a co-signer
A co-signer is usually a family member or close friend with a good credit rating and a stable income who agrees to repay your loan in the event of default.
For example, if you are applying with a co-signer because you are unemployed or your credit is poor, you may get approved for a loan that you would not qualify for on your own. You could also get a lower interest rate, which could save you hundreds or even thousands of dollars over the life of the loan.
While a cosigner can make your personal loan application more attractive to a lender, it’s important to consider the potential downsides of applying with just one. If you fall behind on your payments, you could put the co-signer in a difficult position and damage your relationship, as well as their credit. That’s why you should only apply for a co-signer if you’re sure you can repay your loan as agreed.
Additionally, it is difficult to remove a co-signer from a loan once the funds have been disbursed. Your co-signer may be stuck with responsibility for the debt for a while until you pay it off. Make sure the co-signer you choose not only understands this risk, but accepts it.
6. Find the best personal lender for you
There is no shortage of personal loans on the market. Take the time to shop around and compare a variety of products offered by banks, credit unions and online lenders. Look at their amounts, interest rates, fees, and any special perks they might offer.
It can help you find the ideal personal loan for your unique situation.
Credible, it’s child’s play to compare personal loan rates from multiple lenders without a firm credit application or any effect on your credit.