5 Factors Besides Your Credit That Affect Personal Loan Approval

Your credit score isn’t the only factor that lenders consider when deciding whether to approve you for a personal loan. Image source: Getty Images.

Your credit score isn’t the only factor lenders consider when deciding whether or not to approve you for a personal loan.

When applying for a personal loan, you want to maximize your chances of being approved. After all, when you need money, there’s nothing more frustrating than a lender refusing your loan application.

To make sure you’re not disappointed by a surprise rejection, it helps to understand some of the key factors lenders consider when deciding whether or not to approve you for a loan. Obviously, your credit score is one of the main deciding factors, as your score provides tons of information about your borrowing behavior. But that’s not the only thing personal lenders look at when deciding whether or not to give you a loan.

In fact, a number of factors other than your credit could affect personal loan approval, including your employment history; the amount of your income; how many other debts do you have? if you have applied for many loans; and if you hire a guarantee.

Let’s take a closer look at some of these other factors to better understand how they impact your likelihood of getting a personal loan.

1. Your income

Lenders don’t want to give loans to people who can’t repay them. So when you apply for a loan, financial institutions are understandably very concerned about how much income you have to make the loan repayments.

If you’re trying to borrow for a loan that would have monthly payments of $1,000 but your total monthly income is only $1,500, that’s a major red flag to a lender that you’ll be in trouble. to pay. But if your loan only has payments of $100 per month and your monthly income is over $5,000, you have a much better chance of being approved for a loan since the payments are such a small percentage of what you earn. .

2. Your work history

For most people, income comes from employment. Lenders want to know if your employment situation is stable or if you are likely to lose your job – and your source of income – at any time.

Of course, lenders don’t just call your boss and ask if they plan to fire you soon. Instead, they will usually review your recent employment record. If you’ve been at the same job for a year or two, the financial institution will generally consider it a fairly likely bet that you’ll continue to work with the company. On the other hand, if you only recently got a new job or were promoted to a higher salary level, lenders may not consider this income very reliable.

When assessing how much income you have to repay the loan, it’s common for lenders to only consider the income you’ve earned in the past 24 months. So if you made $50,000 in the last three years but got a raise to $75,000 a month before applying for a loan, lenders will likely assess your loan application as if you still hadn’t earned. than $50,000. This lower income will determine how much you are allowed to borrow or if your loan is approved.

3. Other debts you owe

It’s not just your income that determines whether you’re likely to repay your loan – other debts you owe can also have an impact. If you’re already drowning in debt, lenders won’t exactly line up to give you another loan. After all, if you owe a fortune, any minor drop in your income could prevent you from meeting all of your existing financial obligations.

To assess the likelihood of loan repayment, lenders compare your monthly debt payments to your monthly income. This ratio is called your debt-to-income ratio (DTI). Different personal lenders have different maximum DTIs, but many require your debt payments to be less than around 35% of your income. If you exceed the maximum ratio with a particular lender, your loan application will be denied.

4. If you have applied for many loans recently

Another red flag for lenders is when you submit tons of credit applications in a short time. If you suddenly go on a borrowing spree, financial institutions are very concerned that you are getting in over your head and default is likely in your future.

Lenders can see how much credit you’ve recently applied for by looking at the number of inquiries on your credit report. Every time you apply for credit, for example by applying for a personal loan, mortgage, or credit card, a thorough investigation is placed on your report. These surveys remain there for two years. If you’ve had 10 inquiries recently because you’ve applied for 10 different loans, lenders may be hesitant to lend you.

There is, however, an exception: you can shop around for loans without getting stung. In other words, if you have a few personal loan applications within a few weeks of each other but no new loans appear on your credit report, lenders will likely assume that you are just comparing rates and terms. loans and you will win. Don’t be penalized in the loan approval process.

Of course, if you don’t want to take the risk, you can look for personal lenders who don’t require difficult inquiries to pre-approve you for loans or give you details of the rate you’re likely to get. be eligible.

5. If a guarantee will secure the loan

Sometimes many factors work against you and make it difficult to get a personal loan, such as a low credit score, limited income, or a history of many previous job changes. While many lenders won’t want to lend you under these circumstances, some financial institutions offer secured personal loans that can be much easier to qualify for.

With a secured loan, there is collateral – like cash or other assets – that secures the loan. The lender has a legal interest in the collateral and it can be seized if you don’t pay what you owe. Since lenders could take collateral to cover their costs if you don’t pay, the risk to lenders is limited and loan approval becomes much more likely.

Understand how personal loan approval works before you apply

Understanding the factors lenders consider when deciding who to lend money to can help put you in the best position to get approved. By avoiding applying for too many loans and trying to keep your income and employment status stable, you can maximize your chances of not only getting a loan, but also getting approved to borrow from. a favorable rate so that your loan costs less to repay over time. .

The Ascent’s Best Personal Loans for 2022

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