People take out personal loans for all sorts of reasons. Whether it’s for covering medical bills, debt consolidation, home improvements, vehicle financing, education special events, or any other major expense, a loan can be a saving grace in times of need. However, in order to enjoy the perks that personal loans provide, you first have to get approved for one, and that can be tricky if you’re not familiar with the world of financial services.
While there’s no secret recipe that will guarantee the success of a loan application, given that the eligibility criteria for personal loans vary from country to country and across lenders, there are certain factors that all financial institutions take into consideration when reviewing loan applications. Knowing what factors weigh more in the balance will not only increase your chances of securing a loan but will also make the entire process go a lot smoother and influence important aspects such as interest rates or loan terms.
Lenders look at a number of elements in order to assess an applicant’s eligibility and ensure they’ll get their money back on time. So, let’s explore these key factors and see what you can do to improve your chances of getting approved for a personal loan.
Check your credit score
Out of all the factors that lenders take into account when checking a loan application, the credit score plays the most crucial role. A credit score is a numerical rating that expresses the creditworthiness of an individual. In other words, the credit score helps lenders determine how likely an applicant is to repay the borrowed money on time. The higher the score, the better the chances of being viewed as a trustworthy borrower by financial institutions and getting a favorable response.
You can still apply for a loan even if your credit score and history aren’t looking too good. There are many lenders out there that give out loans to borrowers with low credit scores or thin credit histories, so you might want to search for bad credit loans in Canada if you find yourself in this position. However, keep in mind that bad credit history does limit your loan options, so even if your chances of securing a loan aren’t completely ruined by it, it’s still a good idea to build and boost your credit score. You can do that by checking your credit report for errors and fixing them, making payments on time, and keeping the amount of credit your use low.
Consider your debt and income
When making a loan application, you’ll usually be required to provide information about your annual income and debt situation. Lenders place a lot of importance on these aspects because they want to make sure you have the financial means to pay back the money you intend to borrow, and thus reduce risks.
The amount of debt you carry will also influence your ability to qualify for a personal loan. High income and low debt are what you should strive for as this ensures a good debt-to-income ratio or DTI – one of the metrics that lenders use to measure a client’s ability to repay the loan on time. If possible, try to supplement your income by getting a raise or taking on a part-time job that will bring in an additional revenue stream and help you pay down your debt. That will show lenders you’re able to stay on top of your finances and manage your debt properly.
Shop around until you find the right lender
In recent years, the number of financial institutions providing personal loans has significantly increased and continues to do so. Loan applicants have more options than ever at their disposal, but that doesn’t mean you should apply to each and every lender you come across, thinking that this strategy will increase your chances of approval. Submitting applications randomly without checking qualification requirements first can lead to a long string of rejections that will not only make you waste your time but will also impact your credit score negatively.
The good news is most lenders these days provide information on the minimum requirements an applicant has to meet in order to get approved for a loan. Make sure to check these requirements and only apply to lenders that match your specific circumstances and budget in order to avoid possible rejections. Try to pre-qualify for loans with multiple lenders and after you’ve compared your options, choose the one that best fits your needs.
Add collateral or a co-signer
Another thing that can make it easier for you to secure a loan, especially if you have a low credit score, or you’ve been having trouble getting accepted, is putting down a collateral or adding a co-signer to your loan application.
The collateral serves as a guarantee that you’ll pay back the loan on time, or else you risk losing the assets you’ve used as collateral. Similarly, a co-signer with a good credit score can boost your chances of approval. In case you’re not able to make payments on time, the co-signer will step in and take on the responsibility of repaying the loan.
Be honest when submitting your application
Make sure all the information you provide during the loan application process is correct and accurate. You may be tempted to stretch things a bit when it comes to income or the amount of personal debt you carry, so you can have a better shot at getting a loan but that can backfire, ruining both your application and your credit score.
It would be naïve of you to believe that lenders will simply take your word for it, without conducting any checks and verifications on your financial situation, including employment, revenue, and debt history. Keep in mind that financial institutions will take all the necessary precautions to minimize risks as much as possible, so any lie or exaggeration of the truth on your part will eventually get exposed and that won’t help you in the least.