There are a lot of reasons you may need a personal loan. Luckily there are things you can to help you qualify for a personal loan. You may need to pay off another bill, like a credit card or hospital bill. Or you may need the extra cash to go on vacation or do a little remodeling in your home. If you have several small debts, you might see the benefit in getting a loan to pay them down.
How to Qualify for a Personal Loan
A personal loan can be a great way to take care of those kinds of wants and needs because you can use a personal loan on anything you want. Unlike a car loan or a mortgage, there are no restrictions on how you spend the money you get with a personal loan. You just need to learn the best way to qualify for a person loan so you can get started.
1. Make Sure Your Credit Is In Good Shape
Especially if you haven’t gotten a loan before, you might not know where to start. Getting an evaluation of your own financial state will give you important information about the best way to go about qualify for a personal loan. What kind of loan you are eligible for, and how much you may be allowed to borrow, depends on your credit. The good news is that there are ways you can improve your credit score.
What Counts as a Good Credit Score?
There are three main credit reporting agencies that keep track of your credit history and provide your credit score: Equifax, Experian and Transunion. They use a rating system that most lenders use, which was invented by the Fair Isaac Corporation (FICO). Although the different agencies use pretty much the same system, one may end up scoring you higher than another.
The numbers you get can be classified into perfect, excellent, very good, good, fair and poor designations. A perfect score is 850, and excellent is between 800 and 849. Very good ranges from 740 to 799, and good is 639 to 670. Fair is 580 to 669, and poor is anything less. About one out of five Americans has a poor credit score because of problems on their credit history like bankruptcies and liens.
Moving Your Score Up Fast
There aren’t really miracles you can perform, because if there were, lenders wouldn’t be able to take it seriously. You can go ahead and make a commitment to improving your credit score today, because everything you do will start showing up on your credit report. If it helps, think of it in monthly segments. You can start proving that you can pay your rent and other bills on time.
In just two or three months, you can start to see improvements. A credit repair company may be able to help you, but you should be cautious if you consider it. Those companies are there to make a profit, and you might be able to do as good a job on your own and save the money for your bills. Of course, your credit score will get better on its own if you just wait a long time and don’t make more mistakes, but that could take a long time.
When Negative Events Fall Off Your Credit History
Mistakes you have made in the past won’t stay on your report forever. After a certain amount of time, even the most negative of events will fall off. Collections accounts, or accounts sent off as non-collectible, will fall off 180 days after the date you failed to pay plus an additional seven years. With civil judgements, it will depend on the statute of limitations in your state. Bankruptcy will fall off 10 years after judgment.
2. Pay off Your Bills On Time
This may seem like a no brainer. But if you stay committed to paying your bills on time this will have a highly positive effect on your credit score. The benefits go far beyond simple financial ones, too. You will be surprised how much stress it takes off your daily life when you no longer have late bills hanging over you. You will also save time by doing everything once and having a plan.
- Sign up for autopay on any bills you can. You will still get credit for paying on time even if the payments automatically come out of your account.
- Use financial software that will help you keep track of your bills and give you reminders. Microsoft and Quicken offer easy-to-use and relatively inexpensive options that are popular with many.
- Consolidate any bills you can. If you can get services through one provider, you can have one due date, and you may even be able to get a discount by using one provider instead of several.
- Schedule a time when you always pay your bills. This has the advantage of taking the stress out of the activity while making sure you always stay on top of your responsibilities.
- Have a special place to store and pay your bills. Even if it’s just a drawer, keep them in one place so you don’t accidentally lose track of one. Remember, you have a commitment now, so you need to stay vigilant.
- Keep your bills organized by due date. This will make it easier to budget, as you will know how much you need to pay when. If there are certain times of the month when finances are particularly tight, you might want to consider asking if you can move the due date on that bill to make it easier for you. Some lenders are flexible.
Paying your bills on time helps your credit score, saves you stress and saves you money. You won’t have to pay extra interest and exorbitant late fees if you stick to your plan. Feel free to change and improve on your bill paying plan, as you become more efficient. You will feel a sense of accomplishment once you get into the habit of paying your bills on time.
3. Reduce your Debt As Much As You Can
That sound hard, because you wouldn’t have gotten into debt if you didn’t have to. There are some strategies you can you to start paying down your debts. Having less debt is an obvious way to improve your chance to qualify for a personal loan.
- This is obvious, but the first thing you need to do if you want to get out of debt is stop creating more debt. Many people who are serious about reducing debt start by cutting up their credit cards, especially ones that already have a balance.
- Raise your minimum payments. If you have multiple debts, you can choose the one with the highest interest rate and focus on it. Paying off high interest loans can take years, while you pay interest upon interest.
- Ask for a lower interest rate. Many credit cards will agree to lower your interest rate if you just ask. If you currently have a promotional rate, call and negotiate a good rate for when that rate is no longer valid.
- Look for other sources of income. It may not be a good idea to cash out retirement or life insurance, as most people don’t have enough savings when they need it. But look around for other sources of income, like property you can sell. You may even be able to make money from a part time job or hobby that you can apply directly towards your debt.
- Debt settlement is usually only allowed if you are in danger of default, but it is where you ask the person you owe money to if they are willing to accept a lump sum which is less than what you owe to erase the debt. It may not hurt to ask if you can settle a debt if you feel you can make a reasonable offer.
- Credit counseling takes years but can help you on the way to financial recovery if you feel overwhelmed by your debt. With credit counseling, you may get better terms that help you pay down your debt faster than you would have been able to otherwise.
4. Assets, debts and expenses, oh my! (a.k.a your Debt to Income Ratio)
The relation between debt and income is another way to help qualify for a personal loan. is It is also helpful to calculate your debt to income ratio when considering whether you can afford to take out a personal loan. This will help you prepare to make the new loan part of your budget when the time comes. Simply put, your debt to income ratio is the ratio of your total monthly debt payments to your monthly income. This is one of the most important factors lenders look at because it helps them see what kind of risk you would be when it comes to being able to repay a loan. One of the most important uses of the debt to income ratio is when mortgage providers check for credit worthiness; they usually demand a DTI of less than 43 percent.
How To Calculate Your Debt To Income Ratio
Calculating your debt to income ratio is simple. Add up all the debts you need to pay every month, including rent, auto loans, credit cards, etc. Then divide that amount by your monthly gross income (how much you make before taxes). Then multiply that resulting number by 100 to get your DTI percentage. So it’s (Total Debts /Gross Monthly Income) X 100 = DTI%.
What Is a Good Debt To Income Ratio?
The lower your debt to income ratio, the less risky you are. Anything below 20% is considered especially low, but it probably isn’t reasonable for most people, who have to work to live within their means. Anything about 40% is considered high, and mortgage lenders usually stop at 43% when it comes to lending money for a home. 20 to 40% is considered a safe level, and low enough to be eligible for a loan by many lenders.
How To Lower Your Debt To Income Ratio
If your debt to income ratio is too high, you can still work on making it better. Consider a debt repayment strategy that will help you start paying down your debt. Consider some of the tips from earlier, where you can pay more on a credit card that has a higher interest rate in order to keep from paying more interest for a longer time. Make larger payments if you can, knowing that once you have paid down a debt you will be free from it. You are working toward your own financial freedom, which should be a great incentive.
Keep Checking On Your Progress
Every few months, go ahead and check your debt to income ratio. Even incremental progress should be celebrated, as you work your way toward better credit. Once you have been making larger payments on your highest interest loans, you will be able to see the difference. Knowing how to track your own progress is important so you can take charge of your finances.
Understanding concepts like debt to income ratio will help you see how much progress you are making and what lenders are looking for when you try to qualify for a personal loan. If you start to run into trouble, you will be able to avoid it more quickly if you are watching carefully.
5. Income Amount and Stability is An Important Factor
When you are trying to qualify for a personal loan, the lenders are going to look at what you have done in the past in order to tell what you can be expected to do in the future. They will also consider current factors like how much money you make and how stable you are financially. Of course, lenders aren’t looking for a specific amount of money, but they need to know that you are making enough money that you will be able to pay off your loan. How much money you make is something you need to be aware of when you present yourself to a potential lender.
Using a Loan for Financial Stability
Sometimes the whole reason you need a loan is so you can have better stability. You may shop personal loans so you can pay off a credit card, or even consolidate some higher interest debts. By replacing a higher interest debt with a lower interest personal loan, you may be able to improve your credit score and make credit available in other parts of your life.
Making your bills reasonable can give you more financial freedom. You won’t need collateral when you qualify for personal installment loans, so you won’t need to take the same kind of risk as with a secured loan.
So How Much Money Do You Need?
The amount of a personal loan you could potentially qualify for normally ranges widely, from $1,000 up to $100,000 or so. When you start filling out the application to qualify to get personal loan online, you will be giving all your personal information. One of the first questions will be how much income you have, and the lender will need to know how much you can expect yearly.
You will be promising to pay off the loan over a period of time, so the income needs to be steady. You won’t need as much income for smaller loans, but for larger loans you will probably be expected to make several times the loan amount in a year.
So there are no minimum income requirements, but then the lender will look at factors like your debt to income ratio to see how much of your income is disposable. Disposable income is just the amount you have left over after paying all your necessary bills. If you are trying to qualify to get a personal loan online, you should find out what kind of proof of income they will need to save time during the process.
6. Consider A Co-Signer
So what if you have gone through all this and you don’t think you will qualify for a personal loan, or you think you will qualify but the terms won’t be favorable to you? You may think about trying to get a personal loan with a co-signer. If your credit history is limited or bad, a co-signer could help you qualify for a personal loan without offering collateral or paying a high interest rate.
What Is a Co-Signer Loan?
Any potential lenders, whether banks, credit unions or others, are just trying to make sure their money is safe and that you will pay it back. If you have a co-signer, that person agrees to pay the loan off if you default on the loan. Of course, your co-signer needs to have a good credit history in order for you to get the benefit of their signature. Because your co-signer’s credit is affected by your loan, he or she might make late payments or pay late fees to keep from receiving adverse credit.
Kinds Of Co-Signer Loans
A co-signer can help you get any kind of loan, and some even sign to help others buy houses and automobiles. As far as personal loans, you might especially want a co-signer for help getting an emergency cash loan or another unsecured loan.
Pros and Cons of a Co-Signer Loan
- Pros: You are more likely to get approved for the loan; it will help build your credit; you could qualify for a lower interest rate; you could get help paying the loan.
- Cons: The co-signer could suffer negative effects like a higher debt-to-income ratio; the loan goes on both your credit reports; the co-signer can sue you if you don’t pay.
Consider your relationship with the co-signer before you sign a loan together. Most of the time, your co-signer will be a relative or good friend. If you fail to pay, it could severely impact your relationship.
7. Personal Loan Shopping for A Lender
There are so many lenders out there, and it can be hard to know where to start when it comes to finding an online personal lender. You might try to get a loan at a bank, but they normally require good credit scores and take a while to process a loan. Friends and family might be able to lend you cash, but you need to be careful that it doesn’t affect your relationship negatively.
Qualify for a Personal Loan from Online Lenders
You can search online to find a lender who is offering exactly what you are looking for. That is why online lenders are so perfect for those last minute needs. You know, when you only need a certain small amount. One of the biggest advantages to online loans is that you can have the money in your account the next day, right where you need it.
How Online Loans Work
The online process for getting a small loan, $1,000 or less, is easy and consists of:
- Applying for your personal loan
- Choosing your options
- Getting the cash and
- Repaying your loan.
For larger amounts, you can use a free online lender search service and get pre-qualified. Your pre-approval will last about 24 hours normally, and you will only need to fill out one application; then you will get the offers from various lenders. Your search results will tell you how much you can borrow and what your interest rate will be.
As with any loan, you should only borrow what you need. If you are approved for the loan you choose before 5 p.m., you can expect your loan to be deposited in your bank account the next day.
The Details: What do Lenders Review on Your Credit Report
Now that you understand credit, and your own credit, you can think about what lenders do when they review your credit report. Knowing how they look at your report will help you understand the process better.
Here is the list of information potential lenders look at:
- Your credit history and if you pay on time
- What kind of credit you use, like secured loans or revolving credit
- Your overall debt
- Any new accounts or queries
Lenders want to make loans; that is the nature of their business. You can learn to evaluate your own information. So you can present it in a way that makes you more likely to qualify for a personal loan.
The Details: Reasons Personal Loans Are Rejected
There could be any of a number of reasons why a personal loan is rejected. Here are some of the top ones:
- Errors on your credit report. Being proactive and reviewing it regularly will keep you from having to deal with this at an inconvenient time.
- Carrying too much debt. You should use strategies to cut down on your overall personal debt. So you will be more likely to qualify for a personal loan, but also so you will have more financial freedom.
- Changing jobs frequently. Lenders want someone with a steady income, not someone who might not be working next month.
- Not enough income. Not making a lot isn’t necessarily going to keep you from getting a loan, but it may be worth it to have a second job.
- Too many loan applications. Any time you apply for a loan, the information will appear on your credit report. Luckily, those fall off within a few years.
- Too many loans. Lenders will be nervous about lending you money if you are already overextended.
- Low credit score. There are ways you can work on that.
Consider Pre-Qualifying for a Personal Loan
It’s actually better to get prequalified if you are going to apply for a personal loan.
What Does It Mean To Be Pre-Qualified?
Rather than a full check, a creditor can do a preliminary look. And based on it decide you will likely be eligible for a loan. This is what is known as a “soft pull”. And is the same kind of check potential employers often give new employees.
How Is Being Pre-Qualified Better?
When you are ready to shop personal loans, you don’t want to simply apply at several places at once. All of those queries will appear on your credit report, but a soft pull won’t. You can find out if you’re eligible for a loan without risking your credit score.
Hard and Soft Inquiries
The pre-qualification process presents potential lenders with self-reported information. A hard pull will require you to fill out the application and verify your income. The more knowledge you have about the process and about your own credit score, the more likely you will qualify for a personal loan.
Conclusion – How to Increase your Odds of Qualifying for a Personal Loan
You can increase your odds to make it more likely that you will qualify for a personal loan. Even if you have excessive debt, there are still steps you can take to increase your chances you will qualify for a personal loan. These are steps you will need to make into habits so lenders will look at you more favorably:
- Pay your bills on time, even if it’s just the minimum.
- Avoid filing for bankruptcy if you can.
- Don’t max out your credit cards.
- Avoid opening new credit accounts as a habit.
- Don’t change jobs a lot.
- Watch your credit report and make corrections if needed.
- Don’t apply for a lot of loans — inquiries will appear on your credit report.
- Consider offering collateral.
Lisa has practiced primarily in two fields, law and libraries, and has conducted research and written necessary papers for both disciplines. She has studied social sciences, languages, and computers. She also writes for various personal finance blogs and shares a passion for teaching consumers how to budget and save money.