6 Steps - How To Get Approved for a Personal Loan
For many, a bi-weekly paycheck may no longer provide the necessary income to meet one’s weekly/monthly expenses. One option several people have considered is borrowing money from an outside lender to help them meet their basic needs, take a well-deserved vacation or help offset costs associated with an expected or unexpected life event.
When considering a personal loan, it is extremely important that you understand how lenders screen and offer their loans, especially when it comes to assessing their fees and charging you interest on your loan principal. Before you sign on any dotted line, it is necessary that you research and create a checklist of steps to help you determine the best lender and personal loan for you:
How to Get Approved for a Personal Loan
Step 1: You need to determine what type of personal loan you would like to apply for.
Will you be using the money to help you consolidate your credit card debt, make home improvements, take a vacation, etc.?
Before you get started, it is important that you research the types of loans that are available to meet your needs: personal unsecured loans, home equity loans, secured loans.
Step 2: Check Your Credit Score
There are a lot of ways to obtain your current credit score:
- You can request a copy of your credit report for free (at least once a year) from the three major credit bureaus: Experian, Equifax and TransUnion, to ensure there are no discrepancies or mistakes on your credit report (which could impact your credit score).
- You can use CreditKarma.com (website and app) to track your credit score and balances for free.
- You can utilize the credit security and reporting systems provided by Experian or Equifax for a fee.
After you receive your credit report(s) and score(s), take the time to review the information carefully to ensure there are no issues that may be preventing you from achieving the highest score possible:
- 760 and up = Excellent
- 700 - 759 = Good
- 640 - 699 = Fair
- 639 and below = Poor
Some of the ways you can improve your credit score are by always making sure that you pay your bills on time, keeping your debt-to-credit ratio low and requesting the removal of outdated negative items on your credit history (by contacting the lender directly).
Step 3: Choosing a lender that meets your loan needs
You always want to research potential lenders before you apply. Every time you apply for a personal loan or credit, it triggers inquiries on your credit report and reduces your credit score. As a result, you only want to apply to lenders that you believe meet the qualifying criteria for your loans.
Don’t be shy, contact a potential lender before you apply to inquire what their minimum credit score requirements are for their personal loans. You can also review the lender’s website for their lending criteria.
Financing sources that offer personal loans include: local and national banks, credit unions, and online lenders. Here are some guidelines that might help you decide which lender to reach out to:
- Credit scores below 700 – loans will most likely be turned down by most major banks; if you do get approved, you will mostly likely pay higher interest rates for your loan.
- Credit scores below 640 – approval by most conventional lenders will be unlikely.
NOTE: Avoid high-risk lenders (i.e. payday lenders) as they usually offer insanely high fees, which may push your APR to over 400% or higher. Instead, look for online lenders that specialize in low-credit borrowing.
Only consider reputable online lenders, who are state-licensed financial institutions that have no past or pending lawsuits. You should also review their profile on the Better Business Bureau website.
NOTE: You could also consider researching for your loan on Bankrates.com for the best deals.
Step 4: Create a checklist needed for a loan application
In addition to your credit score, a lender may also require you to provide the following information:
- Annual Income
- Debt-to-income ratio
- Monthly housing payment (rent or own)
- Name of Employer (years of employment)
Be sure not to under or overstate your income on your loan application; provide your pre-tax earnings and make sure to include all sources of income. Be prepared to justify and provide documentation to support your income. It is illegal to falsify your income on a loan application, especially if you are unable to make payments on the loan obtained due to the falsified information.
NOTE: Don’t take on more debt than you can afford
Step 5: Always read the fine print
Before you sign your any loan documents, make sure you ask your lender for a full disclosure of all their terms for your loan; make sure to read all the fine print.
- Fixed or variable interest loan
- Confirm that the lender’s monthly payment and repayment terms work for you
- Understand any fees that may be accessed for late payments
- Inquire whether the lender charges prepayment fees or penalties for paying off your loan early
- Does your lender tack on origination fees that could inflate your loan’s interest rate?
Step 6: Consider your local Bank or Credit Union
You might be able to receive a better interest rate or terms with a bank that you already have a relationship with. Take the time to research and make an appointment to meet with a loan officer at your local bank or Credit Union to discuss possible lending options.
NOTE: If you choose to research online lending options, a good resource is credit.com