When you need money for an upcoming event like a home renovation or wedding, the last thing you want to hear is “your application has been denied.” The trick to getting a great personal loan with a reasonable interest rate is to look at the situation from the lender’s perspective and become an ideal candidate. Here are four ways to boost your chances of qualifying for a personal loan.
1. Make Sure Your Credit is Rock Solid
Like it or not, your credit history will be one of the main ways lenders judge your ability to pay back the loan. Since most personal loans are “unsecured,” they won’t ask you to put down any form of collateral (such as your home or vehicle). Lenders typically gauge your creditworthiness by your credit score (also called a FICO Score).
FICO scores range from 300 to 850, with scores on the higher end likely to provide more favorable borrowing terms and rates. Although it is possible to get approved for a personal loan with Fair or Good credit, people in the 700s or even 800s will have an easier time getting accepted and offered the best interest rates.
If you don’t know your FICO Score, you can find it for free by checking in with Experian (one of the three major credit bureaus). It would also be a good idea to download a copy of your credit report. Then, if you find any errors or inconsistencies, dispute them immediately.
2. Lower Your Debt-to-Income Ratio
In addition to your credit score, lenders will use another metric called your debt-to-income (DTI) ratio. This figure divides your monthly debt payments against your gross monthly income and gives the lender an idea of your ability to repay this loan.
Studies have shown that anyone with a DTI of 43 or higher will have greater difficulty keeping up with the payments. For that reason, lenders like to see applicants with DTI in the 20s or low 30s. Of course, you may still get approved even with a DTI or 35 to 40, but your chances will be greater the lower your number is.
3. Have a Good Reason for the Loan
When applying for a personal loan, the lender will ask what you plan to do with this money. Although you can technically do anything you want with the funds, many people don’t realize that you may be denied based on your answer. Therefore, it will be helpful to have an answer that appeals to the lender.
For example, someone who plans to use their loan to start a business will be more likely to produce income and be able to pay back the loan. Another applicant who may use the funds to consolidate their debt will free up cash flow and have a high probability of making their payments.
4. Don’t Ask for Too Much
Another mistake people often make when taking out personal loans is that they try to borrow too much. The more you ask from the lender, the greater the perceived risk to the lender, and the less likely they are to approve your application.
Instead, calibrate your figure to the exact amount you need. For instance, if you only require $10,000 for a home renovation, only request that amount and nothing more.
The Bottom Line
Qualifying for a personal loan is easy to do by becoming the perfect candidate. Make sure your FICO Score is high, and DTI ratio is low. Don’t ask for more than you need and remember to have a good reason why you’re borrowing the money in the first place.