Getting a personal loan it's not an easy task, especially if your credit is not high. You might not have to give collateral if you apply for a personal loan – but since lenders don’t require collateral for personal loans, the interest rate is higher.
There are several things you have to take into account when you qualify for a personal loan.
What Are The Factors I Should Focus on?
- Income: This is one of the most important factors lenders look at when you apply for a loan. From the lender’s perspective, the higher your income, the more likely he will approve your application with an amount you desire. The lender also considers the income you have left over after taking care of other financial commitments.
- Credit History: This is the next most important factor, which consists of your past and current relationships with lenders. For instance, if you are late paying your credit card bill, a lender considers it a negative remark when you are applying for a home loan. If you paid off your previous loans, to the lender, it makes you look more credible as you go through the loan application process. This is why it’s important for you to pay your bills on time.
- Employment: This factor varies amongst lenders. If a lender does have an employment requirement, it’s possible that they want you to have a full-time job. If you have a part-time job or if you are self-employed, there are other loan opportunities available. Keep in mind that these loans options are fewer in number than ones available for people with traditional forms of employment. Moreover, there are options available for those who are unemployed and those who receive benefits from the government. Keep in mind that you still have to prove how you can pay the loan back.
- Applicant’s age: This is another factor that’s taken into account by the lender to determine your loan term. The younger you are, the higher the probability of you qualifying for a loan. Since lenders place a cap on loans prior to people applying, the younger you are the better.
- Source of Income: Lenders also consider your source of income when deciding whether or not they will grant you a loan. If you have a salary with a company that has a good reputation, it looks very appealing to the lender. Those who are employed by the government and PSUs are considered top priority because lenders consider these stable jobs. Moreover, people who are architects and doctors have high regards as well. Those who are self-employed have to show additional documents such as bank statements and ITR that supports their income.
- Existing Relationship with the Bank: Banks like it when you already have an existing relationship with them as you’re going through the loan application process. Furthermore, making on-time payments on a previous loan from the same back adds a lot of value. Lenders deem you as a trustworthy borrower.
What is The Required Income For a Personal Loan?
Lenders differ regarding income requirements. There are lenders out there that require set minimums. You can find out what the requirements are by looking on their website or by calling their customer service line. Moreover, lenders also weigh your income against your debt and expenses instead of having a cutoff number for eligibility. Now that you know the factors regarding loan eligibility, let’s take a look at ways to increase the probability of you getting a loan.
1. Determine What Type of Personal Loan You Need
As you hear people talking about personal loans, they are talking about unsecured, closed-end installment loans. From a technical perspective, lenders consider mortgages, auto loans, payday loans, and credit cards personal, which is contrary to business loans. Moreover, it’s wise for you to know what type of loan you’re applying for.
Lenders typically offer secured loans for individuals who do not qualify for loans with prime interest rates.
For instance, if you give your home or vehicle up for collateral, you can qualify for mortgage, title, or home equity loan. Moreover, keep in mind that since these are secured personal loans, your home and/or car is at risk of being taken if you fail to pay back the loan.
2. Know Your Limitations
If you want a loan, you should already be aware of your credit history and score. Your bank of choice should be able to tell you the credit requirements of the loan you’re applying for. It’s best to be proactive in obtaining your credit score report and score multiple weeks before applying. Moreover, look over your credit report and review it to ensure there aren’t any inaccuracies.
Lenders heavily take your credit report into account. If there are errors on your credit report, it could cost you your loan approval. Remember to always take into account your financial status while preparing to apply for a loan. Moreover, apply for a loan that you know you can afford to pay back effortlessly.
3. Create a Checklist
It’s crucial for you to craft a checklist of the information you need, which is based on the information from the bank.
In addition, it can take some time for you to obtain the documents you need from creditors, your employer, and other financial resources. If you don’t have all of the information you need, the lender can deny you easily.
4. Improve Your Credit Score
Your credit score doesn’t always stay the same. Moreover, it’s important for you to take actions that will improve your credit score; especially if your credit score is near the next bracket.
- Excellent Credit 760+
- Good Credit 700+
- Fair Credit 640+
If you have a credit score of 770, improving it to 780 is not worth your time. On the contrary, if your credit score is 680, increasing it 770 is a significant improvement which will increase your chance of getting approved. You will also save a lot of money because you’ll have better interest rate options.
The best way to improve your odds of getting approved is to always pay your bills on time and reduce your debt-to-available-credit ratio.
If you have negative remarks or late payments on your credit report, it’s best to wait for six months and not miss payments to improve your odds of getting a loan. Moreover, having a good relationship with your lender is an advantage if you have a negative item on your credit report. Write the lender a nice letter asking him to remove the negative remark.
5. Apply in One Bank At A Time
We advise you to not apply for multiple loans all at the same time. It’s best to see if one or two lenders will approve of you getting a loan. Whether you know it or not, applying for multiple loans shows up negatively on your credit report. Lenders don’t like that at all because they consider you a risky borrower. More than likely, the lender will not approve your loan application.
6. Ask questions
When you find a loan that interests you, contact the bank personally to find out the eligibility requirements.
Also, it may be necessary for you to make an appointment with the loan officer so he can go over the required materials, documents, and timelines in order for you to continue with the loan approval process. Every bank has its own requirements. This is why it’s important for you to know them upfront for preparation purposes.
7. Be Honest
Honesty is a vital attribute you have to have in order to get approved for a loan. If you are dishonest during the application process, lenders will deny your application as they evaluate your credit score and history.
It’s very important for you to be upfront and honest throughout the loan application process.
For instance, if you are honest with us but not successful with getting a loan, you are in a good position for us to help you in your financial situation so you can apply again in the future. It also positions you to be seen as a responsible and respectful borrower.
Furthermore, if you are not honest throughout the application process, lenders will not approve your loan application. This will also prevent you from getting credit from other lenders in the future.
8. Add Spouse/Parents as Co-Applicants
A lot of people do this to add more weight to their loan application.
Adding a family member to your application not only adds fuel to the fire, but it also gives the lender an extra sense of security that you will repay the loan. As a result, you’ll get the amount you desire to have.
What if I’m Not eligible?
Here are some things that you can do if you discover that you don’t meet minimum income requirements:
Apply For A Lower Amount
If you are not able to show the lender you can meet the income requirements, consider borrowing less. Moreover, it’s lower payments for you and less risk for the lender.
Choose A More Affordable Loan
The lender may also feel that the loan fee(s) and the interest rate is too expensive for you. Lenders consider this risky. There are other loans you can get that have lower interest rates and fees. As a result, you’ll be ion a better position to manage your repayments.
Try Your Current Bank
If you have a good relationship with your bank, you will be in a better position to get loan approval. The information regarding the loan product that interests you is on your bank’s website.