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Would-be borrowers with less than good credit can consider a co-signer for a personal loan. |
By
Steve Nicastro,
NerdWallet
There’s no universal formula for winning approval of a personal loan application. Requirements such as credit score and income vary by lender, and some online lenders consider nontraditional data, like free cash flow or education level.
But loan companies have one thing in common: They want to get paid back on time, which means they approve only borrowers who meet their requirements. Here are five tips to boost your chances of qualifying for a personal loan.
1. Clean up your credit
Credit scores are major considerations on personal loan applications. The higher your score, the better your approval chances.
Check your reports for errors. Common errors that may hurt your score include wrong accounts, closed accounts reported as open and incorrect credit limits, according to the Consumer Financial Protection Bureau.
You can get your credit reports for free once a year at AnnualCreditReport.com. With evidence to support your claim, dispute any errors online, in writing or by phone.
Get on top of payments. If you’re not already, be vigilant about making monthly payments toward all your debts, paying more than the minimums when you can. This will benefit your payment history and credit utilization ratio, which is the percentage of your available credit that you’re using. Together, these two factors make up 65% of your FICO score.
Request a credit limit increase. Call the customer service numbers on the back of your credit cards and ask for an increase. You have a better chance if your income has risen since you acquired the card and if you haven’t missed any payments.
This strategy can backfire and temporarily hurt your credit score if it requires a hard pull on your credit, so ask the creditor beforehand, says Justin Pritchard, a certified financial planner based in Montrose, Colorado.
2. Rebalance your debts and income
Loan applications ask for your annual income, and you can include money earned from part-time work. Consider starting a side hustle to supplement your income, or work toward a raise at your full-time job.
Also, do what you can to pay down debt. Consider selling liquid assets such as stocks held in taxable accounts. Using the proceeds toward high-interest consumer debts should get you a higher rate of return, says Alison Norris, advice strategist and certified financial planner at personal finance company SoFi.
Boosting your income and lowering your debt improves your debt-to-income ratio, which is the percentage of your monthly debt payments divided by monthly income. Not all lenders have strict DTI requirements, but a lower ratio shows that your current debt is under control and you can take on more.
3. Don’t ask for too much cash
Requesting more money than what you need to reach your financial goal can be seen as risky by lenders, says Norris.
“Look at the reason why you’re asking for the loan, tie a specific dollar amount to that financial need, and only ask for that amount,” she says.
A larger personal loan also squeezes your budget, as higher loan payments impact your ability to meet other financial obligations, such as student loans or mortgage payments.
4. Consider a co-signer
If your credit scores are in the “fair” range, adding a co-signer with stronger credit and income can increase your chances of approval.
Because the co-signer is equally responsible for repaying the loan, it’s critical to co-sign with someone who can afford the risk, Pritchard says.
“You may have every intention of repaying the loan, but you can’t predict a job loss, disability or other event that impacts your income and ability to repay the loan,” he says.
Have an honest conversation with the prospective co-signer so they fully understand the risks before agreeing.
5. Find the right lender
Most online lenders disclose their minimum requirements for credit scores and annual income and whether they offer options like co-signers.
If you meet a lender’s minimum qualifications and want to see estimated rates and terms, you can pre-qualify for financing. With most lenders, pre-qualifying triggers a soft credit pull, which has no impact on your credit score.
Pre-qualify with multiple lenders and compare rates and terms. The best loan option has costs and payments that fit into your budget.
