There are many reasons for wanting to get approved for a personal loan. You may be looking to pay off high-interest credit cards, finance a dream vacation, or pay for a wedding. First though, you'll need to know how to get approved for a personal loan.
Whatever type of personal loan you need, and whether you apply through a bank, credit union or online lender, here's how to get approved for a personal loan.
And when you're ready to apply, check our list of top-rated personal loan lenders to find the right lender for you.
Before you apply for a personal loan, check your credit score. This is a three-digit number that lenders use to get a sense of how well you manage credit. A strong credit score means you're more likely to get approved for a personal loan. It'll also help you snag the best interest rates.
Here are some ways you can improve your credit score:
If you suspect you won't get approved for a personal loan due to bad credit, it's okay to wait until you are in better financial shape. Each time you apply for a loan, it counts as a hard inquiry on your credit report. Hard inquiries can cause a drop in your credit score, which will ultimately make it more difficult to secure loan approval. Work on your credit until you have a good or even an excellent score and so increase your chances of getting approved for a personal loan.
Ultimately, lenders want to know that lending you money is a safe bet. To get approved for a personal loan, you need to show that you can pay them back on time and in full.
As you learn how to get approved for a personal loan, you will discover that the type of loan you take out and the kind of lender you work with can determine whether or not you get approved. Take time to find what works best for you and your financial situation.
One of the things you'll need to decide is the type of loan you're interested in. Here we cover unsecured, secured, variable-rate, and fixed rate loans.
The type of loan you're interested in may help you narrow down which lender you want to get approved for a personal loan with. For example, if you know that you want a variable-rate loan, that fact will help you narrow down your options. Personal loan lenders include banks, credit unions, online lenders, and payday lenders. Here's a breakdown of each:
Never talk yourself into getting approved for a personal loan you know will be bad for you financially. Rather than pay sky-high interest on a loan from a lender with low credit standards, take the time required to get your credit in order. The worst thing you can do is dig yourself into a deeper hole by taking on a loan that's wrong for you and end up with a monthly payment you cannot afford.
We've included payday loans here because they exist and if you are desperate, they may feel like the only option. However, the interest rates on these loans -- which range from about 390% to 780% -- are so high that it can become almost impossible to pay them back.
Payday lenders may be legal in some states, but there is no way to argue that the APRs they charge are legitimate. In fact, a loan shark is likely to charge a lower APR (although visiting a loan shark is an even worse idea). If you are ever tempted to take out a payday loan, you are better off seeking a personal loan for bad credit.
The maximum amount you can borrow for a personal loan is based on how high your debt-to-income ratio will be after the loan is made.
Let's say you're looking for a loan with a monthly payment of $495, and you already have $1,700 in debt payments every month. The lender will add the payment of $495 to your other monthly payments of $1,700, for a total of $2,195. Now, let's imagine you have a monthly income of $5,000. The lender will divide $2,195 by $5,000 -- and come up with nearly 44%. Chances are, a credible lender is not going to make a loan that pushes you into a DTI of 44%. You should aim for a DTI of 40% or below.
If getting approved for a personal loan is going to push you over that line, you should consider adjusting the amount, paying down debt, or waiting until you are earning more money.
If a lender tells you that you're pre-qualified for a loan, that means it thinks you will get through the approval process. If a lender tells you you're pre-approved, it has offered a conditional commitment to give you the loan. Beware: Some lenders use these terms interchangeably. If someone tells you that you're either pre-qualified or pre-approved, ask them precisely what they mean.
The process generally looks like this:
During pre-qualification, the lender gives you an idea of how much you will qualify for and what the interest rate may be. Pre-approval is when the lender is likely to ask you for documentation regarding employment, income, and identification. As long as nothing negative arises before you close on the loan, you should be good to go.
After pre-qualification, you should have a good idea of what loan you want to take out and what the rates and fees will be.
As it turns out, getting approved for a personal loan may be the easy part. Before you sign loan documents, make sure you understand what you're signing. The interest rate you are originally quoted may not truly reflect how much you will pay for the loan. The APR, on the other hand, better reflects how much you will pay annually because it includes things like origination fees, processing fees, and document preparation fees. If you don't understand the fees, ask about them. If your credit score is high enough, you may be able to get a reduction.
If you make your personal loan payments on time every month, your credit score will climb. In addition, if you use a personal loan to pay off high-interest credit cards, you're likely to experience a rise in credit score. But in the short term, your credit will dip due to the hard credit check required for loan approval.
Perhaps the most important thing to remember when it comes to getting approved for a personal loan is the value of legwork. Take time to shop around to get approved for a personal loan that fits your financial situation, is worth getting and will benefit you the most. The fact that you asked how to get approved for a personal loan means you're going in armed with knowledge.
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