Thinking of applying for a personal loan? Here are the odds of you being approved.
Personal loans can be a cost-effective way to borrow. The interest rate on personal loans is often lower than the rate you would pay on other types of debt, such as credit card debt. And you can use the personal loan for whatever purpose you want, making them perfect for consolidating debt or making big purchases.
But not everyone gets their personal loan approved. And you should not apply if you think you are unlikely to be approved. This is because the application itself can lead to a rigorous credit check and these in turn can hurt your credit score, making it even more difficult to approve other loans in the future.
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The good news is that there are ways to predict the chances of your personal loan being approved. You can do this by seeing how you stack up against key criteria that lenders look at. These include your credit score, income, length of work, and how much other debt you already have.
Personal Loan Approval Criteria
Different lenders set different standards for the approval of personal loans. Some are more willing to forgive a low credit score than others, and some are even willing to look beyond your credit score and consider other factors, like whether you have a good income and what your job.
In general, however, most traditional personal lenders – as opposed to those specifically catering to people with bad credit – have basic minimum requirements that you will need to meet to be approved.
Generally, to maximize your chances of getting approved for a personal loan, you will need:
- A good credit score: Most lenders are looking for a score of 660 or higher. Your credit score is determined by your payment history, the amount of credit you use versus the credit you have, the amount of new credit you have applied for, the age of your credit history, and types of credit that you already have.
- Proof of income: Lenders will want to make sure you have enough income to repay what you plan to borrow. Some lenders have minimum income requirements, such as requiring you to earn at least $20,000. Others don’t have a set income limit, but will instead compare your income to the amount you want to borrow so they can gauge whether you’re making enough money to cover loan repayments.
- A reasonable debt/income ratio: Your income isn’t the only factor that affects your likelihood of repaying a loan. Lenders also look at your debt balance to see what you owe relative to your income – and many lenders require a debt-to-income ratio of around 35% or less. Your debt-to-income ratio is calculated by dividing your total monthly debt payments by your monthly income.
- A solid career path: Lenders may be wary if you have recently changed jobs or only recently started earning your income at your current income level. If you’ve been in your position for at least a year or two, you have a much better chance of being approved.
Your chances of being approved for a personal loan
Your chances of getting approved for a personal loan are determined by your level against these key criteria.
You are almost certain to be approved by at least some lenders for a personal loan if you have good credit, earn enough money to easily repay your loan, have worked for a while, and your debt-to-equity ratio is below 35 % – even taking into account the loan payment you are requesting.
But if you have a credit score below 660, have very little income, or are unemployed and already owe a lot, your chances of being approved for a personal loan are extremely low. In fact, many conventional lenders will reject you outright because they consider you too risky to lend.
You can find personal lenders with bad credit who can approve you even if you don’t meet the criteria lenders look for in borrowers. Unfortunately, many of these lenders charge very high interest rates and it is not a good idea to borrow from them. Beware of lenders who specifically market loans for bad credit or announce that they will offer you a loan without a credit check. Chances are, these lenders will charge you a fortune if you take out a loan from them.
The best way to get approved for a personal loan
The best way to get approved for a personal loan is to make sure you’ve proven yourself to be a reliable and responsible borrower. If necessary, work on improving your credit score, paying off your debt, and wait until you’ve been at your current job for a while.
But if you can’t qualify for a personal loan on your own and need the money urgently, you can also maximize your chances of getting loan approval by finding a co-signer. A co-signer agrees to be responsible for repayment if you don’t repay the loan – and lenders will consider the co-signer’s credit and income when deciding whether or not to approve you.
You should also look for a lender who caters to borrowers with your financial profile. If your credit is fair to good, it makes no sense to try to get a personal loan from a lender who only lends to people with excellent credit.
The good news is that many lenders allow you to get pre-approved for a personal loan before you formally apply – and you can get pre-approved with a soft credit check only. A soft credit check will not cause your credit file to be investigated and your credit will not be affected.
You should be pre-approved by several different personal lenders to compare rates and terms before proceeding with the application process. This will help you determine if you can qualify for concessional financing before you go too far in the borrowing process.
Should I apply for a personal loan?
You should only apply for a personal loan if:
- You are borrowing for something important. Although personal loans are cheaper than many other forms of credit, you are still going into debt and you will have to pay interest. Don’t commit to this obligation unless you really need to borrow.
- You have found a lender with whom you are likely to qualify. Don’t apply for a personal loan that you clearly aren’t qualified for and risk damaging your credit in the process.
Ideally, you should only apply with a lender who has pre-approved you and offers you an affordable loan. Only borrow an amount that you can repay in a short period of time to be debt free as soon as possible.
You now know more about the chances of your personal loan being approved
You now know some key details about the chances of your personal loan being approved, including the factors that affect your approval, as well as how you can maximize your chances of getting a personal loan.
Remember, only apply if you meet the personal lender’s eligibility requirements for credit, income, and debt-to-equity ratio – or if you have a co-signer who will guarantee the loan and increase your chances of approval. . And always try to get pre-approved first so you don’t hurt your credit by applying for a loan you ultimately don’t qualify for.
Our selection of the best personal loans for 2019
We’ve scoured the market to bring you our list of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of our top picks.
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