Boosting Your Chances for Personal Loan Approval
It’s more just than your credit score
As with many things in life, when you apply for a personal loan, it’s helpful to put your best foot forward. Loan approval is based on your ability to repay. By reviewing your credit, fixing any issues, and showing lenders that you can easily afford loan payments, you’re more likely to get approved with the best terms possible.
Spruce Up Your Credit
Before you apply, review your credit to ensure that your credit scores are as high as they should be.
Check your credit: Consumers in the U.S. are allowed to receive one free credit report per year, which provides an excellent opportunity to see what’s in your credit history. Request your reports from AnnualCreditReport.com, which offers reports from the three major credit bureaus: Equifax, TransUnion, and Experian.
Decide whether you need a credit score: Your credit reports contain information about your credit history, public records, and more. But some lenders rely on credit scores to summarize that information and predict whether or not you’ll repay your loan. You don’t necessarily need to know your credit scores (and it may cost extra to order a score), but a score could be helpful. Either way, your credit scores are a result of the information in your credit reports, so focusing on your credit reports should be your priority.
Fix errors: Review each entry in your credit reports to verify that the information is accurate. If you see something you don’t recognize—especially negative items like missed payments or bankruptcies—fix those errors. Mistakes can drag down your credit scores and they may be a sign of identity theft, but you’ll only know about those issues if you read through your credit reports.
The information in your credit reports determines your credit scores. If you know your score, but you don’t know what’s in your credit reports, you might be missing opportunities to raise your scores.
Get current: If you’re behind on loan payments, it’s wise to get caught up before you apply for another loan. If lenders see that you’re already missing payments on other loans, they can’t be confident that you’ll pay any new loans.
Minimize Existing Debts
If you have other outstanding debts, you can still get approved for a personal loan, but it’s best to manage those debts before you apply.
Lower your debt-to-income ratio: In addition to your credit scores, lenders evaluate how much you earn each month compared to your monthly debt payments. For example, if you have an auto loan, student loans, or other debts, lenders consider those obligations along with any new payment on the loan you’re applying for. To do so, they calculate a debt-to-income ratio. If you pay off old loans before you apply—thereby eliminating the monthly payments—you can improve your debt-to-income ratio and your chance of success.
To see your debt-to-income ratio, divide your total monthly debt payments by your gross monthly income. For example, let’s say you make $5,000 a month and you pay $500 each month on student loans and $500 per month on an auto loan, for a total of $1,000. $1,000 divided by $5,000 is 0.20, so your debt-to-income ratio is 20%.
Don’t max out cards: The amount of debt on credit cards influences how much you need to pay each month. As a result, paying down your credit cards may make it easier to get approved for a new personal loan.
Plus, maxing out your cards raises your credit utilization ratio, which harms your credit scores. Your credit utilization ratio is how much you owe compared to your credit limits. It’s best to keep your credit utilization ratio as low as possible, but definitely below 30%.
Raise your limits? You can also ask credit card issuers for a credit limit increase, but that strategy poses some issues. Doing so can make it look like you’re using a smaller percentage of your credit limit—which is generally good for your credit. But your request might trigger a hard inquiry, which may offset some of the benefit of the higher limit.
Plus, a higher credit limit doesn’t reduce how much you owe on your cards (or the monthly payment). And if you have trouble controlling your spending impulses, a higher credit limit might just tempt you to rack up more debt.
Apply When You Have Consistent Income
Lenders may ask about your income when you apply for a personal loan, so it’s critical to show that you can easily afford the monthly loan payments. The best time to apply for a loan is when you have consistent income. That not only improves your chances of getting approved, but also of getting the best loan terms. You may need to wait to apply if you’re unemployed or you don’t have steady income.
Select the Right Lender
Once you understand your credit, your income, and your monthly obligations, find a lender that’s a good fit. It’s wise to compare quotes from three lenders before making a decision, and the application process helps you learn about each lender.
Lenders review your credit and income, and some lenders use alternative approaches to evaluate your application. If your credit is less-than-perfect, finding the right lender might help you save money on your loan. For example, some lenders evaluate alternative factors, like educational history and college degrees—so a recent graduate might have good luck with those lenders.
Other lenders might target borrowers with credit scores above a certain level. If you don’t fall into their sweet spot, applying might not be the best use of your time (or you might pay more if you get approved).
Do You Need a Cosigner?
If you’re having trouble getting approved for a personal loan, a cosigner might help. A cosigner applies for a loan with you and agrees to repay the loan if you fail to keep up with payments. That works best when the cosigner has good credit and plenty of income to support the required monthly loan payments.
When your credit scores and income aren’t sufficient, look for a cosigner with better credit and more income than you have. In many cases, that might be a family member or close friend.
Be aware that asking somebody to cosign is asking them to take a massive risk. If you don’t make your loan payments for any reason (including your accidental death or inability to work during illness), the cosigner is responsible for your payments. If they don’t pay, their credit will suffer, and the lender can pursue collection from them. You could be setting your generous friend or family member up for garnished wages and payments on a loan that they don’t benefit from.
How to Get Approved
You’re undoubtedly busy, and there are only 24 hours in a day. But putting extra effort into your personal loan application can potentially save you time and money. You may be able to score a lower rate, minimize origination fees, and get approval from the best lenders available.
Federal Trade Commission. "Why Your Credit Score Matters," Accessed Oct. 1, 2019.
Federal Trade Commission: Consumer.gov. "Your Credit History," Accessed Oct. 1, 2019.
Federal Trade Commission. "Credit Scores," Accessed Oct. 1, 2019.
Consumer Financial Protection Bureau. "Credit Score Myths That Might Be Holding You Back From Improving Your Credit," Accessed Oct. 1, 2019.
Consumer Financial Protection Bureau. "Timing of Applications for Consumer Credit," Page 2. Accessed Oct. 1, 2019.
Consumer Financial Protection Bureau. "What Information Do I Have to Provide a Lender in Order to Receive a Loan Estimate?" Accessed Oct. 1, 2019.
U.S. Government Accountability Office. "Agencies Should Provide Clarification on Lenders' Use of Alternative Data [Reissued With Revisions on Mar. 12, 2019]," Page 2. Accessed Oct. 1, 2019.
Consumer Financial Protection Bureau. "What Is a Co-Signer?" Accessed Oct. 1, 2019.