Personal loans come in many forms and can include student loans, signature loans, share loans, debt consolidation loans, or life loans for events like a wedding or vacation. Although these are some of the most popular types of loans, getting approved for a personal loan can be difficult. Traditional banks typically have high loan qualification standards, making it challenging for individuals with a low credit score or average income to gain approval.
Fortunately, there are several ways to increase your chances of having a personal loan application approved. Requirements can vary depending on the lender, but most financial institutions pay close attention to your credit history and score, current credit card balances, income profile, employment history, and existing non-revolving debt.
Even if you do not currently qualify for a personal loan based on the standards of your financial institution, there are steps you can take to improve your likelihood of gaining approval. Here are seven ways you can boost your chances.
Review Your Credit Score
Your credit score is one of the most important factors when applying for a loan. Before starting the application process, ensure your score is as high as possible and in line with the financial institution’s guidelines.
US consumers are eligible to receive one free credit report per year. This enables you to review your credit history and determine where or if it needs improvement.
Credit report errors are surprisingly common, so review every entry to verify it is correct. Pay particular attention to information that might negatively affect your score, such as missed payments, wrong account information, inaccurate credit limits, or other discrepancies. Glaring errors could be interpreted as red flags for identity theft, but they are often administrative mistakes that can result in a bad credit score.
You can dispute information on your credit report with the financial institution that published the error or through cooperation with the bureau that provided your credit report.
If you’re working to recover your credit score from past financial troubles, consider that credit unions are often more flexible when it comes to approving personal loans. Because they are not-for-profit organizations, they are member-focused and may agree to work with you to create a repayment plan that works for your budget while improving your credit score.
Pay Off Your Debts
One of the fastest ways to improve your credit score is to pay off your debts. A common issue that can significantly diminish your score is having a lot of credit card debt. This high credit utilization ratio may demonstrate to a financial institution that you cannot manage personal finances.
Although clearing debt can be stressful and daunting, there are effective strategies to manage it over time. Tips for regaining control over your debt include:
- Create a budget to monitor your income and expenditure.
- Limit credit card spending.
- Adjust bad spending habits, such as splurging on nonessentials.
- Focus on paying off delinquent debt first before concentrating on high-interest debts such as student loans.
- Consider starting a side hustle or second job.
- Stick to healthy spending habits when you pay off your debts.
Having a low amount of revolving debt (debt that is not a set loan amount over a designated period) is normal. It shows lenders you are capable of managing your finances. However, it’s essential to keep your debt-to-income ratio as low as possible. While some revolving debt is good, focus on keeping your credit utilization rate at 30% of your total credit limit or less. 43% debt-to-income ratio is commonly used as a threshold by lenders for determining whether you qualify for a mortgage.
Be Cautious with Credit Cards
When used correctly, credit cards bring many benefits, such as earning bonuses, rewards points, and cashback. However, many people struggle with the irresponsible use of credit cards, resulting in high levels of debt that are challenging to repay.
Credit card debt and missed payments are two of the first things lenders look for when inspecting your credit record. For example, your payment history accounts for 35% of your FICO score (a type of credit score). Carrying your credit card balance from month to month should be avoided because it increases your credit utilization ratio, impacting your credit score.
Ensure you’re cautious with credit card spending and make all payments on time. Avoid spending more than you can afford just because your credit card limit allows it. It is often beneficial to use tracking apps to monitor your spending to gauge whether you’re staying within your means or if you’re overextending yourself financially.
Try to Keep a Steady Employment Profile
Most lenders require loan applicants to have a steady monthly income because this demonstrates an ability to meet monthly payment requirements. Frequent job changes or gaps in your employment history may cause lenders to have concerns over your ability to pay back borrowed money.
If you plan to apply for a personal loan in the future, try to create a stable work situation for several months to prove you are responsible enough to repay the funds.
If you can’t work due to illness, disability, or other reasons, you’ll need to demonstrate that you have good credit and earn a consistently reliable income from retirement funds, government benefits, social security payments, or a retirement pension.
Don’t Apply for a Loan Beyond Your Means
Avoid applying for more money than you need. Lenders will view this as an unnecessary risk and are less likely to approve your request. Calculate the exact loan amount you need and work out the monthly payment amount and loan duration. Once you determine you can afford the payments, proceed with your loan application.
Find a Co-Signer
If your credit score isn’t high enough or your income doesn’t meet the financial institution’s threshold, consider using a co-signer to help you secure the loan. A co-signer is someone who agrees to pay back the money you owe if you are unable to. Alternatively, applying with a joint application may be enough to secure approval. The other applicant holds equal responsibility for repaying the money borrowed, so if their income and credit score are sufficient, the financial institution is more likely to issue the loan to them.
A co-signer can be a parent, family member, or close friend who is prepared to accept the responsibility of paying back the loan.
Choose the Right Lender
One of the most important ways to boost your chances of getting a personal loan approved is to find the right lender. While you might think applying to multiple lenders will improve your chances of getting the loan approved, remember that applying many times in a short period can make you look high-risk and potentially knock your credit score. According to financial experts, there is little benefit to applying to more than three lenders because the offers and rates beyond that will vary minimally.
Do your research and identify the minimum requirements of various lenders. Ensure you meet these requirements before beginning the application process. This helps you secure the most competitive rates.
For small personal loans, credit unions are an excellent option. These member-owned financial institutions typically offer loans at lower interest rates than banks.
Contact T&I Credit Union for a Personal Loan
T&I Credit Union is a leading financial institution in the Detroit area, and we proudly offer our services throughout the seven surrounding counties.
Besides offering personal loans at competitive interest rates, we provide our members with additional services, including ATM cards, online banking, a mobile app, auto loans, student loans, and mortgage refinancing. Get in touch with us today for advice, guidance, or more information on our loan offerings.