Ways to Improve Your Chances of Getting a Loan Approved

Have you ever had your loan application rejected? You’re not the only one. Many lenders have strict creditworthiness requirements, so many people are dismissed.

But don’t let this keep you from applying for a loan. There are ways you can improve your chances of getting approved, and we will break down the A to Z in this blog. Below are strategies on how to get approved for a personal loan.

Key Takeaways

• If you’re seeking approval for a personal loan, start by assessing your current financial situation, including checking your credit score and employment status and paying off old debts.
• Determine how much you need to borrow. This will help you narrow down your search to specific financial institutions and loan types.
• Depending on your needs, you can apply for small-dollar loans, bad credit loans, debt consolidation loans, and cosigner loans, among other things.

Understand Your Financial Profile

Your financial profile is essentially your credit history and current income level. Reflecting on your financial situation can help you second guess, to a certain degree, your eligibility for this and that loan product. And while different lenders might have varying requirements, here’s how you can get a snapshot of your financial profile before you start any loan application.

Check Your Credit Report

Your credit report may determine whether you get a loan. Not sure what it looks like? You can get a report from any national credit bureau, such as Experian, Equifax, and TransUnion.

You can get a free copy from any of these agencies once every 12 months. However, you can request a copy for a small fee anytime. If you also have an open credit card, some credit organizations include information about your credit score in their monthly reports as part of their service.

Generally, a credit score of 690 and higher is considered good. But again, this varies from lender to lender, and they won’t be basing their decision on only that. They will closely examine your current income streams to determine your creditworthiness.

Pay Down Debt

If you currently have debt on your shoulders, paying it off quickly can demonstrate to creditors that you’re a responsible borrower. Taking too many debts is not a good sign to lenders, and it is not easy for you either.

Pay off any outstanding debts before applying for new ones, as this can boost your credit score. You can either start by repaying debts with the highest interest rates first or tackle the easier ones. If you can pay off the debt quickly, ensure the lender does not charge early repayment penalties.

Improve Your Eligibility Before Applying

Proactive steps towards better financial management can increase your eligibility before applying, making your case more robust and convincing. These include paying your utilities on time, maintaining a steady income, and keeping your credit card balances below 30%.

These all count towards building a good reputation of yourself in the eyes of the creditors. They’re going to require a lot of paperwork, including bank statements, so it’s better to make sure you don’t have anything suspicious or untrustworthy going on there.

Determine the Amount You Need to Borrow

Once you’ve clocked in on your current financial situation, determine the right amount to borrow. This will help you with your financial planning as you can anticipate how much your monthly payments will be based on your loan amount. Of course, it also depends on the interest rate you get and the loan term.

Choose Your Loan Type

The next step is to choose the type of loan product you want based on your needs and circumstances. Consider the following loan types:

Small Dollar Loan

A small dollar loan is a short-term loan, typically with a loan amount of $100 to $2,500. These loans can work when you need funds, such as emergency car repairs or medical bills. The repayment period is usually from a few weeks to a few months.

Small-dollar loans usually have quick application process times. Lenders may pay more attention to your income stability than your credit score. Because of this and other factors, interest rates are generally high for small-dollar loans.

Bad Credit Loan

Some lenders offer personal loans for people with poor credit. These are for individuals who might not have the perfect score of 690 or higher but can demonstrate a steady revenue stream. Bad credit loans come at higher than average interest rates, given that the risk of default is higher.

These can also be good options for those who need emergency funding. Moreover, if you make your payments on time, this can also be a good opportunity to rebuild your credit, pushing your credit score higher in the long run.

Debt Consolidation

Debt consolidation is one of the most common ways to deal with multiple debts. It allows you to combine debt into one loan, typically at a lower interest rate. Consolidating your debts helps simplify your debt management — you make only one monthly payment for all loans.

To qualify for debt consolidation, you may not need a good credit score, as many lenders in this space also consider factors like Debt-to-Income (DTI) ratio, income, collateral, and others.

Loan with Cosigner

Loans with a cosigner are loan types where another individual — mainly with a good credit standing — agrees to share the responsibility of your loan’s repayment. If you default on the loan, the cosigner must repay the loan according to the agreement.

In most cases, a cosigner with a high credit score can be a green flag for lenders, raising your chances of getting a loan approved. You might even score lower interest rates thanks to your cosigner’s good reputation as a borrower. However, you need to research and find lenders that allow for cosigner loans, as not everyone on the market offers these types of loans.

Family Loan

A family loan is an informal arrangement where one family member lends money to another, typically without going through a formal financial institution like a bank. These loans are often based on mutual trust and have flexible terms. However, treating them with some formality is essential to avoid misunderstandings or complications later on.

Prepare Documents the Lender May Require

When applying for a loan, lenders typically require documents to assess your financial standing and ability to repay. Commonly requested items include proof of identity (government-issued ID), proof of income (pay stubs, tax returns, bank statements), and credit history (credit report and authorization to run a credit check). 

Depending on the loan type, they may also ask for collateral documentation (e.g., title or appraisal for secured loans), proof of address (utility bills), and the loan purpose (purchase contracts or invoices). For larger loans, additional details such as marital status, guarantor information, and business plans (for business loans) may also be required.

Research and Compare Lenders

With that in mind, researching and comparing different lenders is a quintessential step in your loan application process. 

Compare institutions, starting with interest rates, loan amounts, and terms. Remember that traditional banks and credit unions tend to follow predefined eligibility criteria. 

Some credit organizations are more lenient to people from their community, offering them better terms and more loan products.

After receiving a loan offer, check origination fees, prepayment penalties, and late payment fines. If these seem too high, they probably are — which means you may need to apply elsewhere.

An alternative option may be an online lender. Unlike traditional banks, these lenders sometimes offer customized loans and an approval process with more emphasis on your current income. 

Never fall for ads stating “no credit score loans,” as these are mostly scams. No lenders will ever ignore your credit score completely, and it still plays a crucial role in decision-making for any type of loan. It’s just that some lenders may pay less attention to it than others, but they still do.

Apply for Prequalification and Accept the Loan

You are much more likely to receive a loan when you are prequalified. Another benefit is that the prequalification process is often much shorter than the entire application and may affect your credit score less.

To request prequalification, gather your personal information, bank statements, housing expenses, existing debts, and any other information the financial institution needs. 

After applying, you may get a preliminary offer on your screen stating your potential loan terms and interest rates. 

If you like what you see, you can continue to the entire application, which will likely include a hard credit check and a final answer about your loan approval.

Getting approved for a loan is a commitment. No worries if your last loan application was rejected, as there’s somewhat of a science behind how to get approved for a personal loan. A good credit score and a steady income are your greatest allies in getting your loan application approved. Follow these steps and make sure to do your research on lenders and apply confidently!

FAQ

Is It Hard to Get a Personal Loan?

Applying for a personal loan isn’t very hard. Getting one can be difficult, depending on your creditworthiness and income level. Banks and financial institutions assess your ability to repay the loan based on multiple factors, including where you work, how much you earn, and your credit score.

What Is the Best Way to Get a Personal Loan? 

Compare different lenders online by carefully analyzing their interest rate ranges, loan terms, and requirements. Many lenders offer prequalification, where you can see the potential terms without affecting your credit score. Prepare the necessary documents and apply confidently.

What Is a Debt-to-Income Ratio?

The debt-to-income ratio measures how much money you pay for your debt compared to your monthly earnings. The lower it is, the more it demonstrates a good balance, which can be a good sign to potential lenders. An ideal debt-to-income ratio will vary by lender and loan type.

Does Applying for Multiple Loans Hurt My Credit Score?

The short answer is “kind of.” Applying for even one loan can temporarily hurt your credit score. However, this depends on the type of credit check the lender performs. If they run a hard credit check, this will temporarily lower your score. 

However, multiple checks in a short period do not hurt your credit score exponentially. Credit scoring models often treat multiple inquiries for the same type of loan within up to 45 days as a single inquiry.