How To Boost Your Personal Loan Approval Odds

Personal loans are one of the most flexible credit products in the market. They can be used to cover almost any expense. But if you have a limited credit history or poor to fair credit, getting approved for one can be tricky.

That said, there are actions you can take to boost your personal loan approval chances. For example, you could take steps to increase your credit score before applying or ask someone to cosign your loan.

5 steps to increase your chances of getting approved for a personal loan

Although each lender has its own eligibility criteria, following these steps can significantly increase your odds of approval.

1. Give your credit a little boost

Your credit score plays a crucial role when it comes to loan approval and how much interest you’ll pay. The higher the score, the better. Here’s how to make sure your credit makes the cut:

• Review your credit report: The Federal Trade Commission found that one in five Americans has errors in their credit report. Before applying for any credit product, request a copy of your credit report to see if everything is accurate. It may take up to 30 days for the bureau to respond and for the error to be corrected on your report, so check before applying.
• Make on-time payments: Your payment history is key to keeping a good credit score, as this makes up 35 percent of your score under the FICO model. That’s why it’s important to stay on top of your bills or contact any creditors if you’re having trouble making payments.
• Pay down revolving balances: A high credit utilization ratio can have a serious negative impact on your credit score. Experts recommend not using more than 30 percent of your total available credit.
• Avoid opening or closing accounts: Whenever you apply for a new credit product or close an existing account, your credit score drops temporarily by a few points. When thinking about applying for a personal loan, avoid making any sudden changes to your accounts that could affect your credit.

2. Determine how much you need

Personal loans are a type of installment loan, so they are issued for a lump sum. Before applying for a loan, crunch the numbers to see how much you need. Make sure that you only borrow what you can afford and need.

When running numbers, make sure to account for the following: 

• Interest rate: Interest rates for personal loans can range from around 8 percent to 36 percent, depending on your credit and other factors. Compare offers from multiple lenders to ensure you get the lowest rate.

• Loan term: Loan terms for personal loans typically range from two to seven years. While longer repayment periods will reduce your monthly payment, you’ll end up paying more in interest over the life of the loan.

• Fees: Some — but not all — lenders will charge origination fees and prepayment penalties in addition to late payment fees and returned check fees. Narrow your search by eliminating more fee-heavy providers.

3. Add a cosigner

If you don’t have a good credit score or if your income is on the lower end, try applying for a loan using a cosigner. A cosigner is any individual who agrees to be equally responsible for your loan. This means they are required to make payments if you don’t.

To improve your chances of approval, you must choose someone who has good credit and sufficient income. The lender will consider these factors as part of your application. Likewise, it’s best to pick someone you trust, such as a close friend or a family member.

4. Don’t settle for the first lender you find

Each lender has its own set of requirements for loan approval. By prequalifying with multiple lenders, you can compare potential offers without dinging your credit score.

Most personal loan lenders offer prequalification with a soft credit inquiry, which doesn’t impact your credit score. When comparing offers, pay close attention to the annual percentage rate (APR). It includes both your interest rate and the lender’s administrative fees to understand the overall cost of the loan.

Additionally, try looking for lenders that offer discounts or any other perks that can make your loan more affordable. Some banks offer discounts to current customers. Many lenders will discount your APR by 0.25 to 0.50 percent for signing up for automatic payments.

5. Double- and triple-check your application

Once you choose a lender and fill out the application, make sure you review all the information provided carefully. This will help boost your loan approval odds, as omitting details or providing incorrect information could result in your application being denied.

Factors that influence personal loan approval

When applying for a personal loan, lenders will check the following to determine whether it’s in their best interest to lend you money:

• Credit history: Lenders check your credit report to determine how risky of a borrower you may be. The better your credit score and history, the better your chances of approval.
• Income: Lenders check your income to determine your ability to repay the loan.
• Debt-to-income ratio: It compares your monthly debt payments to your monthly income. Lenders use it to determine how much you can afford to borrow. They prefer a DTI under 36 percent, though up to 50 percent may be acceptable.
• Loan amount: Larger amounts mean more risk for the lender, so they’re harder to qualify for. The lender may require collateral to issue a loan approval, especially if you need to borrow a large sum.

Bottom line

Borrowers with varying credit backgrounds can get personal loans. But it gets more challenging with a lower credit score. Do a little legwork to ensure your score is solid and understand the factors lenders for loan approval. This can help you tailor your application to improve your chances.

Before you submit a loan application, compare personal loan rates and terms from several lenders to get the best deal for your situation. Reading personal loan reviews can also help jumpstart your search.