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How to Improve Your Chances of Getting Approved for a Personal Loan

Lyle Daly, The Motley Fool


Need a loan and worried that you could get denied? Follow a few pieces of advice and you can dramatically improve your chances of getting approved for a personal loan.

Young couple signing contract.

Image source: Getty Images.

Despite how common it is to apply for a personal loan, it’s still one of those situations where you second-guess whether you’ll get approved. After all, you’re asking a company to give you thousands of dollars.

What you do before you apply can make a big difference in your chances of getting approved for a personal loan. Fortunately for those of us who don’t like to wait around, you can get started on improving your odds today.

Check your credit

In this case, you’ll want to check both:

  • Your credit report -- You can request one free copy of this from each of the three major credit bureaus (Equifax, Experian, and TransUnion) per year.

  • Your FICO® Score -- You can check your FICO® Score with Experian free of charge through its website. Equifax and TransUnion also have online services to view your credit score, but they have a monthly fee.

The reason you should pull your credit reports is to check them for errors, because any errors can drastically affect your credit score. If you notice an error, you can contact the creditor that reported it and dispute it with the credit bureau online.

Your credit reports will not, however, have your credit score on them. You need to know your credit score so you can verify that you’ll meet a lender’s minimum requirements. Most lenders look at your FICO® Score, so make sure you’re checking that. Many of those free credit score sites only show you your VantageScore, which won’t be as useful.

Pay down debt

Debt, particularly credit card debt, can make it more difficult to get approved for a loan. Before you apply, you should work on paying down your debt as much as possible, starting with your credit card balances. There are two ways this will help your loan application:

  • Paying down credit card balances lowers your credit utilization, which makes up 30% of your FICO® Score. Since card issuers report your balances every month, you could improve your credit score in a matter of weeks by reducing your balances.

  • Your debt-to-income ratio is a key factor lenders look at with your loan application. The lower your debt-to-income ratio, the better your chances for approval.

Avoid hard credit inquiries

A hard credit inquiry is what happens when a company pulls your credit to decide if it’s going to approve you. There are all kinds of circumstances that can involve hard credit inquiries -- loan, mortgage, and credit card applications are the most common, but you could also have a hard credit inquiry if you applied to rent an apartment or open a new cell phone plan.

The reason you want to avoid hard inquiries before applying for a personal loan are two-fold:

  • Each hard inquiry can reduce your FICO® Score by a few points. Such a small change probably won’t make the difference in a lender’s decision, but it’s best to play it safe.

  • Too many recent hard inquiries are one factor that indicates a higher-risk applicant. That can make lenders more cautious about approving your application.

Try to go without any hard credit inquiries for at least three to six months before your loan application.

Choose the best lender for your financial situation

There are many different varieties of lenders out there. Some focus on high-income applicants in need of low-APR loans, whereas others are geared towards consumers with bad credit or consumers who haven’t built much credit history yet.

Finding the appropriate lender is important so that you don’t waste your time or your money. If you apply with a lender when you don’t meet its credit score or income requirements, you’ll likely get a denial and a hard inquiry on your credit file. If you have great credit but you apply with a lender intended for bad-credit borrowers, you’ll probably get approved, but at a higher APR than you could have gotten elsewhere.

To help you choose the best lender, we’ve put together a page with the best personal loan providers for all kinds of financial situations. It also includes a tool where you can plug in your credit score, zip code, the purpose of your loan, and your desired loan amount to check which lenders will fit your needs.

Apply with a cosigner

If you don’t have excellent credit, the best way to improve your chances on a personal loan application is to find a cosigner who does. When you apply with a cosigner, it’s essentially as if that person is applying for the loan. They’ll also be responsible if you miss a payment or default, which is why people can be wary about cosigning.

Maximizing your odds of approval

The most important factors in your chances of success with a personal loan application will be:

  • Your income

  • Your credit score

  • Your debt-to-income ratio

  • The lender you choose

With the right strategy before you apply, you can definitely improve in some of the areas lenders will look at and make yourself a more approval-worthy applicant.

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