Critical requirements for a personal loan
Before you apply, you must familiarize yourself with how to qualify for personal loan. Although all lenders are different, most of them evaluate eligibility for a personal loan based on factors such as:
Credit rating: lenders view your credit score as a measure of your creditworthiness. A lower credit score suggests that you may be a risky borrower. Lenders protect themselves from this risk by charging higher interest rates while leaving the most competitive rates and terms for those with excellent credit history. If your score is less than 640, you probably won't be able to find a perfect personal loan.
Payment history: your payment history matters the most when determining your personal loan qualifications - it makes up 35% of your FICO score. That is why past missed payments will haunt you; one late payment can remain on your credit report for up to seven years.
Income: before lenders approve a loan, they want to ensure you have a steady income for your payments. A shorter personal loan means higher monthly payments: let's say you're looking for a $15,000 loan with a five-year repayment period and an 8% interest rate. Your monthly payment will be $304, and the three-year term includes a monthly payment of $470.
Debt to income ratio: DTI gives creditors an idea of how much of their current income is already going towards debt repayment. To calculate your DTI, add all your minimum monthly debt payments and divide the total by your gross monthly income.
Until you apply for credit and determine if you have personal loan eligibility, answer the questions of whether you need debt capital and can afford its maintenance.
Algorithm for obtaining a personal loan
Ready to start the application process? Here are the steps to go through:
View your credit score and credit report
Your credit score is at the top of the list of requirements for a personal loan. You can verify your account (no consequences) in minutes by opening a free LendingTree account. Another good habit for determining your personal loans eligibility is reviewing your credit report at least once a year. You will be able to see debts affecting your account.
Credit scores range from 300 to 850, but many lenders require a minimum score of 600 to approve a borrower for a personal loan.
Find lenders and pre-qualify
The Internet makes finding personal loan lenders relatively easy these days. Using the LendingTree personal loan tool, enter basic information about yourself and what you need from the loan. You will receive loan offers that you can compare and potentially apply for.
You can also contact lenders directly on their website or in person at a bank branch. Just make sure you complete the personal loan qualification.
Shopping around and choosing the best rate
Once you have passed the preliminary qualifications for personal loan, the next step is to compare quotes to find the best lender for your needs. Remember: lenders don't give away money for free, so read the fine print to ensure there are no surprises. When you are happy with your decision and have chosen an interest rate, repayment term, and monthly payment that suits you, get ready to collect supporting documentation to meet your personal loan lender's requirements. It includes, among other things, proof of employment, income, and your place of residence.
What to do if you are denied a loan?
If you didn't pass qualifications for a personal loan, don't get too upset. You may be able to find other lenders who will be willing to work with you. It is critical to note that there are many ways to improve your chances in the future. Here is what you can do:
Examine your credit report. Unfortunately, mistakes and fraudulent activities can happen, and these incidents can affect your credit history.
Improve your DTI ratio by paying off all old debt. If you have a high DTI ratio, lenders may see that your budget is too tight, and they may not be able to afford the loan.
Make sure you are up to date with all your bills. Late payments can show up on your credit report for up to five years and signal to the lender that you may not be paying on time in the future. As a result, the lender may hesitate to offer you a loan.
Apply with a guarantor. A low credit score can be a significant hurdle for borrowers seeking a personal loan. Applying with a guarantor can make the process a little easier for you.
Offer a deposit. Applying for a secured loan is another path to avoid bad credit. In the eyes of lenders, providing a valuable asset reduces the risk of lending to someone who might not otherwise be able to meet their credit requirements.
Getting a personal loan from a lender can take one to three business days (or more) after you've passed personal loans qualifications, depending on the lender. Online lenders tend to be a bit faster with funding than banks as they don't require you to drive physically to a location as some banks do.