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From home renovations to debt consolidations, personal loans can be one of the most flexible ways to fund any type of expense. They typically do not require collateral, have lower interest rates, favorable loan terms, fast funding times, extended repayment periods, and are much easier to manage. If you require a lump sum of money for an emergency or an immediate need, then they can be your most viable option. If you are considering applying for a personal loan but aren't sure if you'll get approved, continue reading! Here are five common ways of improving the odds of personal loan approval.

1. Improve Your Credit Score

A good credit score is essential for increasing the chances of loan approval. Typically, lenders consider applicants with a credit score below 640 as risky. A high credit score indicates to the lenders that you are a responsible and financially stable borrower and likely to repay the loan on time. Additionally, lenders also offer better loan terms to applicants with good credit scores, which can make the loan more affordable and manageable for you. Examples include extended repayment periods, lower interest rates, and lower fees.

Payment history is one of the most crucial factors influencing credit score. Consistent with timely payments for your credit obligations like credit cards, loans, and utility bills is one way to impact your credit score positively. Keeping credit utilization low is another way to do so. Credit utilization refers to the percentage of your available credit that you're currently using. You should keep your credit utilization ratio below 30%, which means that if your credit limit is $1,000, maintaining a balance below $300 is ideal.

You should also avoid applying for multiple credit cards simultaneously, as too many hard inquiries can negatively impact your credit score. Additionally, regularly review your credit reports to identify and dispute any inaccuracies. Errors can negatively impact your score, so promptly correcting them is essential.

2. Find the Right Lender

There are many personal loan lenders, each catering to various circumstances and financial needs and having their own requirements. You shouldn’t settle for the first lender that comes your way and find the one that suits your circumstances the most. For example, while you may think you can not qualify for a loan with a low credit score, some lenders consider applicants with a score as low as 550 or 600, and some lenders even consider applicants with an insufficient credit history.

If the primary purpose of your loan is to repay an old one, then find lenders that offer loans explicitly for that purpose. They’ll even send the funds directly to the creditors, eliminating the hassle of manually paying off the loan. Some lenders even offer loans with terms aiming to build up credit; for example, lenders offering préstamos personales en San Antonio, TX. However, remember that if you get approved for loans with poor credit scores and history, you will typically be subject to interest rates.

Before settling for a lender, consider prequalifying with several lenders. During prequalification, lenders will conduct a soft credit inquiry, which will not impact your credit score. They will assess your financial profile and provide an estimated loan amount, interest rate, and repayment terms. This will give you a general idea of your eligibility without affecting your creditworthiness, and you will be able to analyze their loan terms and interest rates better and compare them with one another.

3. Reduce Debt-to-Income Ratio

Lenders also use the debt-to-income ratio (DTI) to determine your personal loan eligibility, and a lower DTI can make you more attractive to lenders when applying for a loan. DTI measures the percentage of your monthly earnings that you spend paying your existing loans, and a lower DTI indicates that you have more expendable income for covering your daily expenses and repaying a new loan.

The most direct way to reduce your DTI is to increase your income. You should also focus on paying high-interest debts as soon as possible, as they contribute significantly to your DTI. If you’ve borrowed from multiple lenders, consider taking a debt consolidating loan to pay them all off and consolidate your debts into a single one with a lower interest rate. This will reduce your monthly payments and overall DTI.

4. Consider a Co-signer

If you have a limited credit history or a lower-than-ideal credit score, a co-signer can help boost the odds of your loan getting approved. The lender will consider both your and your co-signer's credit history,  and a co-signer with a consistent income and high credit score will help improve your creditworthiness in the eyes of the lender.

Lenders also view a co-signer as additional assurance of repayment, offering you better loan terms like lower interest rates and more extended repayment periods. Having a co-signer can also increase the maximum loan amount you qualify for.

Before asking someone to cosign for your loan, you must have an open and honest discussion with them about the risks and responsibilities involved. You should clearly explain the loan terms and ensure they understand that they will be legally obligated to make payments if you default.

5. Don’t Apply for More Than You Need

Many lenders also consider how much money an applicant is applying for when deciding whether or not to approve their application. Applying for a considerable amount can hurt your chances of approval. It's crucial that you only apply for the amount necessary to meet your needs.

Before submitting your loan application, it's essential that you carefully consider and calculate the approximate amount that you require. Additionally, when considering your repayment plan, factor in the interest rate, loan terms, and loan fees to ensure that you won't default, as that will have a significant negative impact on your credit score.

Endnote

Personal loans can be one of the best ways to get a lump sum to fund your needs in an emergency or otherwise. If you're considering applying for a personal loan but aren't sure about your chances of approval, take the above tips into consideration.