Are you in need of quick cash to take care of an emergency? Well, chances are a personal loan is at the top of your list—and for good reason. These loans are easy to apply for and take a short time for disbursement to you, making them popular among Americans.
In addition, they also come with low-interest rates, as low as 4% depending on your credit score. While all this sounds good, lenders will still have to examine several factors to evaluate your eligibility for a personal loan.
Among those they’ll evaluate are your credit, monthly income, credit utilization, collateral, etc. By ensuring these factors are above the lender’s minimum requirements, you increase your chances of qualifying for a loan.
Take a look at some of the tips you need to follow in order to avoid being rejected for a personal loan.
1 – Scrutinize Your Credit
If lenders don’t look at anything else, they’ll certainly look at your credit when you apply for a personal loan. It’ll undergo more scrutiny if you’re applying for an unsecured personal loan. Your credit includes both the credit score and credit history.
Good credit history and score will get you a personal loan without too much hassle. In addition, you’ll qualify for favorable terms. On the other hand, poor credit will lead to rejection. If that’s the case, but you’re lucky enough, you may get approved; however, prepare for a high-interest rate.
The best way to know where you lie is by requesting a credit report from all three leading credit reporting bureaus. Keep in mind that you’re entitled to at least one free report every year. Once you get the report, you can compare it against the lender’s requirements.
While at it, go through the report with the aim of rooting out any inconsistencies. Did you know that up to 25% of Americans come across inaccurate entries in their reports? With this in mind, you can see why it’s important to go through your report. Report these incorrect entries to the bureaus, and they will fix them.
2 – Income Requirement
Many lenders will look at your monthly income when considering your loan application. If you don’t meet their minimum amount, they’ll reject your application outright. According to financial experts, bankers often calculate your fixed monthly obligations to net monthly income (FOIR).
Typically, you want this ratio to be under 40 to 50 percent if you expect a chance of qualifying for the loan. In addition, the lender will also include the Equated Monthly Installment (EMI) on the loan plus other EMIs you may be paying at that time.
Therefore, to avoid rejection by lenders, it’s important for you to calculate these expenses before making a 5000 loan no credit check application. This will allow you to know how much you qualify for. Financial advisors also recommend going for longer payoff time loans. This means lower FOIR and EMIs, which will increase the chances of landing a personal loan.
3 – Pay Off Outstanding Balances
On-time bill payment is critical to your loan application. This also goes for your credit card balances as well. Lenders look at this crucial factor when considering your loan application.
By paying your bills on time, the lender will see a sense of responsibility on your part. This increases your creditworthiness and chances of loan approval. Furthermore, the lender will measure how much debt you have versus your total monthly income, also referred to as the debt-to-income ratio (DTI).
If you have a high DTI, it means you have too much debt. You want this ratio to be below 40% if you want to take out a personal loan. This will only happen once you reduce your debt burden or increase your income.
4 – Employment is Key
When applying for a personal loan, the lender will want to know your income sources. The aim of this is to find out whether you have a stable income. Employed borrowers will have a higher chance of approval compared to freelancers.
Also, depending on the amount of money you seek, the lender will want to know how long you’ve been employed at the same job. This may seem biased against freelancers; however, you may want to search for lenders who accept such sources of income before making an application.
5 – Maintain a Low Credit Utilization Ratio
Your credit utilization ratio is a number showing the amount of credit available compared to your credit limit. This number is crucial to your overall credit score, in fact, it makes up a whopping 30% of the score.
Since your score is vital to your loan application, you want to maintain a low credit utilization ratio. A high figure means you’re using a lot of money to repay debts, which makes you a high-risk borrower, more likely to default on payments.
As a result, the lender will turn down your application. Therefore, it’s important to keep this number as low as possible – typically, at 30% or lower.
6 – Prepare Collateral
There are cases where you may need to provide collateral in order to get approved for a personal loan. A secured personal loan from a bank is one such instance. A collateral or security is a piece of property you put up against the loan during application. It is what the lender will use to recoup their money if you default on payment. While this is a risk to the borrower, it will allow you to qualify for a loan and at good terms such as low-interest rates.
7 – Loan Purpose
Personal loans are known for their flexibility when it comes to usage. Often, lenders will not care what you intend to use the money on. However, there are those lenders who’ll require you to state your intentions for the loan amount.
For example, there are lenders who don’t extend personal loans for business purposes. Thus, it’s important to go through the terms and conditions of the loan and understand what you can and cannot use the money on.
8 – Confirm Your Details
Your lender will turn down a loan application with unverifiable details or mistakes. In most instances, banks and other lenders don’t verify the details themselves; instead, they hire independent contractors to make sure there’s no deliberate effort to hide or misrepresent facts.
In addition, even if your loan application gets approved, the final approval will depend on whether you submitted all necessary documents on time and in a credible manner. Even the slightest mistake will lead to rejection.
9 – Limit Your Applications
There are two types of credit inquiries—hard and soft. The former may slash some points of your score, but that will depend on the number of times these inquiries have to be performed. When you apply for a loan, most lenders will perform a hard credit inquiry.
Too many hard inquiries will lower your score and ultimately affect your chances of getting approved for a loan. This is why it’s important to limit the number of loan applications you submit.
There isn’t a surefire way of knowing whether or not the lender will approve your personal loan application. You could meet all the criteria set out and still get turned down at the lender’s discretion.
Be that as it may, as you can see from this article, there are other factors within your control that you can work on to improve your chances of getting loan approval.