Do you need a way to find relief from your high-interest loans? Do you have a large amount of credit card debt you want to eliminate? If so, you aren’t alone.
Americans owe approximately $1.04 trillion in credit card debt, which is up from under $854 billion only five years ago. If you are in this situation, a personal loan can help.
While getting to know personal loan requirements is a good first step, it’s also necessary to learn what you need to do and what to avoid when applying for this monetary assistance. Keep reading to find out.
Get Your Credit Cleaned Up
When applying for a personal loan, your credit is a huge factor of if you are approved or not. The higher score you have, the better approval odds you have.
Make sure to check your reports for any errors. Some of the most common errors you may find include:
- Incorrect credit limits
- Closed accounts reported as being open
- Wrong accounts
You can access your credit score, for no charge, once a year. If you find an error and want to dispute it, make sure you have evidence to support your claim.
If your credit score isn’t as high as it should be, take some time to improve it before applying for a personal loan. This means paying bills on time and reducing your credit utilization ratio. If possible, request a credit limit increase from creditors.
Determine What Type of Loan You Want
There are two main types of personal loans, including unsecured and secured.
With a secured loan you put up collateral, like your car or home, which can be taken by the lender if you fail to pay. These loans don’t have such stringent credit requirements, and you may have a lower interest rate and more borrowing power. With this loan, though, you are putting your property at risk.
An unsecured loan doesn’t require collateral. Instead, they rely on your creditworthiness and your ability to repay. You need a decent credit score for approval. You may also have a higher interest rate than what you receive with a secured loan.
Don’t Request Too Much Cash
Requesting more money than what you need to achieve your financial goal is considered risky by lenders. Look at why you are requesting a loan. Put a specific dollar amount to the financial need and only request that amount.
Keep in mind that larger personal loans squeeze your budget. They require higher loan payments and impact your ability to meet your financial obligations. You can learn more here about this factor.
Common Requirements for a Personal Loan
There are several basic requirements you must meet to receive approval for a personal loan. These requirements are listed here.
Your Current Credit Rating
As mentioned above, your credit rating plays a huge role in whether or not your loan application is accepted. Lenders consider your credit score an indication of your creditworthiness.
If your credit score is low, it suggests you are a risky borrower. All lenders are going to try and protect themselves from this specific risk by charging higher interest rates. They will also keep more competitive rates and terms for individuals with superior credit.
If you find your low score is preventing you from securing a personal loan with a reasonable interest rate, consider using a cosigner. This may help tip the scales in your favor for approval. If that isn’t an option, it’s a good idea to revisit why you need the personal loan, to begin with.
Your Payment History
This is directly related to your credit score. Your payment history carries significant weight when it comes to determining your credit score.
This is one of the main reasons a history of missed payments is going to come back to hurt you in the future. Even a single late payment is going to remain on your credit report for up to seven years.
The majority of lenders are looking for individuals who have credit scores that are excellent or good. They are also going to look at the individual’s repayment history.
Again, at this point of the application process, the lender is looking for reassurance you are going to make good on the personal loan payments. A strong track record of making payments on time is going to increase your odds of approval.
Before giving your application the stamp of approval and sending you a check, lenders are going to want to make sure you have steady money coming in to afford your payments. Besides a general credit check, a lender is going to look into your income.
It doesn’t matter what the repayment period is. Lenders are typically only interested in one thing – the ability for you to pay the bill after all your current debt payments are made. Will your current income be enough to cover the new monthly payment?
This is where the debt-to-income ratio comes in. This number gives a lender the idea of what part of a person’s existing income is going to pay off their debt. You can figure yours out by adding up all of your minimum debt payments and then dividing the total by your monthly income.
Personal Loan Requirements: Do You Measure Up?
Don’t worry, even if you aren’t able to get a personal loan now, you may be able to apply in the future. It’s a good idea to review the personal loan requirements listed here carefully, and check with individual lenders to see if there are any others you need to meet.
By doing this, you can feel confident you have the best chance possible to be approved for the loan you want or need. Keep in mind, working with a lender, providing the requested information, and being transparent is going to be the best way for you to secure the funds you need.
If you want to learn more about personal loans, make sure to check out some of our other blogs. We offer information on a wide array of topics to suit virtually any audience.