How you can increase your chances of being approved for a personal loan.
7 ways to increase your chances of being approved for a personal loan
The best defense against personal loan rejection is to know what it takes to be approved by a lender. These seven tips should help increase your chances of getting that approval notice.
1. Check the credit requirement
Your credit is one of the main factors lenders consider when you apply for a loan, especially an unsecured personal loan. Each has its own minimum you must meet in order to qualify, and fortunately, not every lender requires excellent credit. Some providers, like independent online lenders, will only require fair or good credit. But if you don’t meet the lender’s requirement, no matter what it is, you will likely be rejected outright. If you’re unsure your credit score or history qualifies, ask the lender before you apply.
2. Check the minimum income requirement
Many lenders also have a minimum income requirement. This may not be listed on the lender’s website, so you’ll have to do some digging — either by calling the lender directly or browsing one of our review pages. Like your credit, this is one of the things many lenders consider necessary. After all, if you don’t have the income to pay back your loan, you can’t afford to borrow.
3. Meet the employment requirement
Lenders generally consider income of various sources, but not always. Sometimes freelance work or benefits won’t cut it. A lender may require you to have been employed by a company for a certain number or years, or that you receive your income through direct deposit, so make sure your work counts before you apply.
4. Have sufficient collateral
Not every loan is unsecured. Some loans — especially those from banks — require you to provide collateral in order to borrow. This can take the form of a piece of property, or it can simply be a source of liquid money that your lender can use in case you default. While this puts more risk on you should you default, it lowers the risk the lender faces. Generally, this means you’ll get a better interest rate or better terms, which could save you money in the long run.
5. Limit your outstanding debt
Your debt-to-income ratio, like your income, is a measure of how much you can afford to borrow. It not only shows lenders that you can pay your loan each month, but also that you’re responsible with your money. A high debt-to-income ratio indicates that you’re using too much of your money paying off other loans, which include things like your house, car and credit card. If your debt-to-income ratio is too high, generally over 40%, you may want to consider paying off some of your outstanding balances before you apply for a new loan.
6. Ensure your loan purpose is allowed
Although personal loans are open and can be used for a number of things, not every lender allows your loan to be used for just anything. For example, you may not be able to use your loan funds for secondary education expenses or your business. Check with your lender to ensure you can apply your funds to whatever you need.
7. Verify your details
Before you submit, double-check your application. Missing even small details could result in a rejection. If a lender can’t verify your details, it won’t be able to extend a loan to you. Your Social Security number, contact details, employment, income and documents all have to be correct in order for the lender’s underwriting process, which is usually automated, to ensure you’re capable of meeting the minimum eligibility requirements. Take the time to ensure your personal information is correct when you apply.
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Factors to consider when applying for a personal loan
- Limit your applications. When you apply for a loan, the application is counted as an inquiry on your credit report. Too many inquiries can negatively affect your credit score, which could result in your next application being rejected.
- Keep your credit report clean. Pay your debts on time and avoid defaulting on your loans. The more you show you’re a reliable borrower, the more likely you’ll be to get a loan.
- Check your credit report. You should monitor your credit report to make sure everything is up to date and accurate. If there are any inconsistencies, report them to the credit bureau you ordered your report from and wait to apply until problem areas are fixed.
6 top reasons lenders reject personal loans
- Bad credit history. If you’ve made multiple late payments, defaulted on a loan or been in bankruptcy, a lender is unlikely to approve your loan application. Check your credit score to see what kind of problems are listed on your report.
- Insufficient income. A lender won’t approve your application if you can’t afford the monthly payments that come with borrowing a loan.
- Your loan purpose. Lenders are more likely to approve loans for debt consolidation or home improvement than vacation or secondary education. If your loan purpose doesn’t match with a lender’s expectations, you won’t be approved.
- Missing information. Lenders will verify the details you put in your application. If you’ve entered something incorrectly, your lender will probably reject your request for funding.
- Unstable employment. Lenders are very meticulous about the stability of your job. A number of lenders insist that you should have a stable job or at least a regular source of income.
- Too many loans. If you already have a loan or extra debt, you might be rejected. This is because your debt-to-income ratio will be relatively high, indicating you may not be able to pay off your loan.
There’s no way to completely guarantee that your personal loan application will be approved. Even if you meet all the eligibility criteria listed by a lender, the lender can still reject your application at its discretion. However, you can avoid common mistakes that lead to personal loan application rejection and follow the tips we’ve discussed to improve your chances of approval. You can also compare your personal loan options to find more lenders you may be eligible for.