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Obtaining approval for a personal loan can be a challenging process. Maybe you need money for home repairs or a big purchase. However, not knowing what lenders want can make the process confusing.
Lenders often look at your credit score and income to decide whether to approve your loan.
This post will guide you on how to get approved for a personal loan. You’ll learn tips to boost your chances and avoid common mistakes.
Keep reading to make loan approval easier!
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Understanding Personal Loan Approval
Lenders assess your financial history to decide if you’re a good fit. They also verify that you meet their basic requirements for approval.
What lenders look for
Lenders check your credit score and credit history first. A good credit score indicates that you pay bills on time and manage your debts effectively. They also review your payment history, debt-to-income ratio, and annual income to see if you can afford the loan.
They might also consider nontraditional factors, such as employment stability or even education level. A steady job or savings helps build trust in your ability to repay the loan.
Proof of income and address are often required during this process.
Common eligibility requirements
You must be at least 18 years old. Being a U.S. citizen or legal resident is also required.
All loans require a valid, verifiable bank account. You can apply in any U.S. state or Washington, D.C., but not in U.S. territories, such as Guam or Puerto Rico.
Preparing for Loan Approval
Preparing for a loan can increase your chances. Taking small steps now makes approval easier later.
1. Check and improve your credit score
Check your credit report for mistakes. Errors, such as incorrect payment history or incorrect amounts, can harm your credit score. Visit AnnualCreditReport.com to get free reports from the major credit bureaus: Equifax, Experian, and TransUnion.
Dispute any errors you find immediately.
Pay bills on time to boost your FICO score. Set up reminders or automatic payments if needed. Maintain a low credit utilization ratio by using less than 30% of your available credit limit across all accounts.
Avoid opening too many new lines of credit simultaneously, as each hard inquiry can temporarily lower your score.
2. Pay down existing debts
Lowering your debt helps improve your chances of loan approval. Focus on paying off high-interest debts, like credit cards or payday loans. This lowers your debt-to-income ratio (DTI), which lenders prefer to see at or below 36%.
Paying down balances also reduces your credit utilization ratio, which boosts your credit score when kept below 30%. Start with the smallest debts or those with the highest interest rates for faster results.
3. Reduce your debt-to-income ratio
Reduce monthly debt to lower your debt-to-income (DTI) ratio. Pay off credit card balances or reduce unsecured loans. Lenders prefer a DTI of 35% or less, but aim for below 43% to boost approval chances.
Boost income while keeping spending steady. Consider taking on part-time work, selling unused items, or saving more from your paychecks. A better DTI demonstrates to lenders that you can easily manage new financial obligations.
4. Increase your income or savings
Add income from part-time jobs, freelancing, or side gigs. Report all sources, such as alimony or child support, to show a stable annual income. Even small boosts in income can lower risk for lenders.
Cut expenses like dining out or subscriptions you don’t use. Put extra savings into an account as proof of financial readiness during your loan application.
5. Avoid multiple loan applications
Applying for too many loans at once can hurt your credit score. Each loan application results in a hard credit check, which can lower your FICO credit score by a few points.
Lenders may see multiple applications as risky behavior. This could make approval more difficult or result in higher interest rates. Stick to one well-thought-out loan application instead of several at the same time.
Strengthening Your Loan Application
These simple steps can make your loan application stand out. Small changes can improve your chances. Focus on what makes you a strong borrower.
6. Determine the loan amount and purpose
Select the loan amount that best suits your needs. Personal loans can go up to $50,000, but you should borrow only what you need. Use a loan calculator to determine monthly payments based on various loan amounts and terms.
Know why you need the money. Lenders often ask about the purpose of the loan during your application. Typical uses include debt consolidation, paying medical bills, or refinancing credit cards.
Giving clear reasons helps strengthen your case for approval.
7. Gather required documentation
Collect the necessary documents for your loan application early. You will need to provide personal identification, such as a driver’s license or passport. Provide proof of address, such as utility bills or lease agreements.
Show your proof of income with recent pay stubs, tax returns, or bank statements. These help demonstrate your ability to manage monthly payments. Keep these documents ready to expedite approval and prevent delays in loan disbursement.
8. Consider a co-signer or co-borrower
A co-signer or co-borrower can help you get approved. Lenders view good credit as added security, which lowers their risk and improves your approval chances.
A co-borrower shares both the loan and repayment duties with you. A co-signer only promises to pay if you don’t. Both options boost your application strength, especially if your credit score is low or your income is limited.
9. Use collateral for a secured personal loan
Using collateral can help you get a secured personal loan. Collateral is something valuable, like a car or savings account, that you agree to give the lender if you don’t repay the loan.
This lowers the risk for lenders and may increase your chances of approval.
Secured loans typically have lower interest rates than unsecured personal loans. Lenders feel safer knowing they can recover their money through the collateral if needed. Make sure the value of your collateral matches or exceeds the loan amount.
Missing payments could mean losing what you pledged as security, so only offer items you’re prepared to risk.
Comparing Lenders and Loan Options
Compare rates, terms, and fees to choose the best personal loan… your wallet will thank you!
Compare interest rates and repayment terms
Focus on APR rates, as these show the actual cost of personal loans. For example, a credit score over 720 may result in rates as low as 14.80%, while scores under 560 may incur rates as high as 165.66%.
A lower rate means paying less interest.
Scrutinize repayment terms as well. Shorter loan terms often have higher monthly payments but save you more money overall. Longer terms have smaller payments but result in paying more interest over time.
Use a loan calculator to align your budget with the best option for you.
Look for lenders suited to your credit profile
Choose lenders that match your credit score. If your score is 580 or lower, consider options like Upstart, Avant, OneMain Financial, Universal Credit, or Oportun. These lenders often work with borrowers who have bad credit.
Check what they offer before applying. For example, LendingTree lists a $1,000 loan for 3 years at a 6.73% APR with a monthly payment of $30.75. For $5,000 loans at the same rate and term length, the monthly payment rises to $153.77.
Find a lender whose terms meet your financial needs and ability to repay on time.
Online lenders vs. traditional banks and credit unions
Online lenders approve loans faster. Some funds are available for your loan within 24 hours. They use easy online processes and offer flexibility. If you need quick cash, they are a good choice.
Traditional banks or credit unions may offer lower interest rates. They often favor borrowers with strong credit scores and long histories with the bank. These lenders also provide personalized assistance throughout the loan process.
Understand fees, penalties, and flexibility
Check for prepayment penalties before signing. Some loans charge fees if you pay off early, but many personal loans have no such charges.
Look at the flexibility in repayment terms. Automatic payment withdrawals can simplify monthly payments and avoid late fees. Compare other costs, such as origination fees or missed payment penalties, to select the best option.
Pre-Qualification: Test the Waters First
Pre-qualification gives you an idea of what loans you might qualify for without hurting your credit score. It’s a quick way to explore options and prepare before submitting an application.
What does it mean to pre-qualify
Pre-qualifying means a lender checks if you might qualify for a personal loan. They use basic details, such as your annual income, credit score, and financial obligations. This step does not affect your credit score because it involves a soft credit check.
It helps you see estimated interest rates and loan terms before applying. You can determine if your loan application has a good chance of approval without committing to it yet.
Benefits of pre-qualification
Pre-qualification helps you compare rates without hurting your credit. Lenders use soft credit checks for this step, which won’t lower your credit score. You can see potential loan terms and interest rates before applying.
It also saves time by narrowing down lenders that match your needs. If a lender pre-qualifies you, you will likely meet their approval criteria, such as income or debt-to-income ratio.
This way, you’ll avoid unnecessary hard inquiries on your credit report.
Soft inquiries vs. hard inquiries
Soft inquiries check your credit without hurting your score. These events occur during pre-qualification or when you review your credit report. Lenders use these to see if you might qualify for a loan.
Hard inquiries happen once you apply for a loan. They show up on your credit report and can lower your score slightly. This type of check confirms details like payment history, debt-to-income ratio, and credit utilization ratio before making approval decisions.
What to Do if You’re Denied
Don’t stress, learn why your application was denied, and explore ways to strengthen your chances next time.
Request feedback from the lender
Ask the lender why your personal loan application was denied. They can explain what went wrong, like low credit scores or high debt-to-income ratios. This feedback highlights areas for improvement before reapplying.
Use this advice to fix issues on your credit report or update financial documents. Reducing your debt or increasing your income may improve your chances of approval next time.
Fix errors on your credit report
Check your credit report for mistakes. Visit AnnualCreditReport.com to get a free copy. Look for wrong account details, late payments you never missed, or debts that aren’t yours.
Dispute errors right away. Contact the credit bureau with proof, such as statements or receipts. Resolving these issues can boost your credit score and increase your chances of loan approval.
Improve your credit profile before reapplying
Pay all your bills promptly. Timely payments contribute positively to your credit score, with payment history accounting for 35% of that score. Reduce balances on credit cards or loans to decrease total debt.
This helps maintain your credit utilization ratio, which should remain below 30%.
Address any inaccuracies on your credit report immediately. Mistakes can unfairly impact your scores. Refrain from opening unnecessary new lines of credit, as applications can lead to temporary decreases in your credit score.
Concentrate on simple actions, such as keeping old accounts active, to demonstrate a long and strong credit history.
Explore alternative financing options
Try using a 0% APR credit card for short-term needs. These cards allow you to pay no interest during the promotional period, which can last up to 18 months. Always pay on time to avoid losing this benefit.
Cash advance apps like Earnin or Dave offer small loans before your payday. They charge low fees instead of high interest rates. You can also use home equity financing if you own property, tapping into its value to cover larger expenses at lower interest rates than personal loans.
Frequently Asked Questions
Do you have questions about getting a personal loan? Here are answers to help you move forward with clarity.
Can I get approved with bad credit?
You can still get approved for a personal loan with bad credit. Some lenders, such as Upstart, OneMain Financial, Avant, and Oportun, specialize in loans for borrowers with low credit scores. For instance, Upstart offers APRs from 6.6% to 35.99%.
Loan amounts range from $1,000 to $50,000 with terms between 36 and 60 months.
If your score is below 580, consider using a co-signer or a secured loan. Providing proof of income and reducing your debt-to-income ratio also helps. Focus on lenders who work with borrowers like you to improve your approval chances without risking hard credit checks upfront.
What documents will I need?
Lenders will typically request personal identification, such as a driver’s license or passport. You’ll also need proof of address, such as a utility bill or rental agreement.
Proof of income is essential, too. Pay stubs, tax returns, or bank statements can show your ability to repay. For the loan application, provide details about the loan amount and purpose.
Keep these documents ready to expedite the approval process.
How long does the approval process take?
The approval process for a personal loan typically takes 1 to 10 business days. Online lenders often approve loans faster, sometimes within hours or one business day.
After approval, funds are usually sent in 1 to 3 business days. To avoid delays, be prepared with all required documents, such as proof of income and credit reports.
Will applying affect my credit score?
Applying for a personal loan may impact your credit score, but not always. If you only pre-qualify, it will not be reported on your credit report. This is because lenders use a soft credit check during this step.
A hard inquiry occurs after you submit your entire application. Hard inquiries can lower your credit score by a few points and stay on your report for two years. Limit applying to avoid several hard checks simultaneously, as it also reduces approval chances.
The Bottom Line
Getting approved for a personal loan doesn’t have to be hard. Focus on improving your credit score and lowering your debts. Plan your loan amount and gather all the needed papers. Compare lenders carefully to find the best fit for you.
Pre-qualify first to avoid hurting your credit score. Follow these steps to secure a loan that meets your needs while boosting your financial health.
