Many people need to borrow money at some point in their lives. The reasons why and the loan amounts may differ, but one thing is always the same: They want their application to be approved.
If you plan to apply for a loan, here are some suggestions that could help improve your chances of getting a loan approved:
Check your credit report for errors
Fact-checking your credit report is the first thing you should do before filling out a personal loan application. The slightest error could alter the decision of a lender and should be addressed as soon as possible.
Checking your credit report for discrepancies is also a great way to protect yourself from identity theft. So, in addition to making sure your basic information is correct, check your report for the following errors:
- Accounts you didn’t open
- Charges you don’t recognize
- Unexpected account balances
- Unexpected hard credit inquiries
If you find unauthorized activity on your account, you can file an identity theft report with the FTC right away.
Remember, you don’t have to just accept your credit report at face value. If you find records of missed payments or other problems that you believe are inaccurate, contact the creditor or reach out to the credit bureaus directly and ask them to investigate.
Check eligibility before you apply
Have you ever received mail claiming you were “preapproved” for something you hadn’t applied for, like a credit card? This is because the company that sent it believed you may be a good potential customer. Sometimes lenders and other businesses will prequalify these individuals for certain offers.
Every time you apply for a loan, the lender checks your credit to ensure that the loan is a good idea from a risk standpoint. Many lenders allow potential customers to check to see if they are prequalified on their websites.
While prequalification is not a guarantee of approval in most cases, it can save you time and increase your chances of getting a loan with that lender because it gives you a sense of how likely you are to be approved.
Second and perhaps more importantly, it can protect your credit score. Applying for a loan triggers a hard credit inquiry. Repeatedly applying for loans and being denied can have a damaging effect on your credit score. However, seeing if you prequalify for a loan first will not negatively affect your credit score.
ADVERTISEMENT: For those considering a personal loan with OneMain Financial, visit our prequalification page to find out if you are prequalified.
Lower your debt-to-income ratio
One overlooked tip to increase the chances of loan approval is to improve your debt-to-income ratio, or “DTI”. This calculation is a percentage of how much of your take-home pay is used to pay your debts every month.1 The higher your DTI ratio, the lower your chance may be of loan approval. Some lenders may be more lenient if you have excellent credit or high equity in a home, but ultimately, DTI is all about how much income you have available each month to pay back the loan.
In order to lower your debt-to-income ratio, you’ll need to take a full assessment of your personal debt and develop a plan. You will need to either increase your income, lower your debt or both. For tips on how to do this, check out the following blog posts:
- How Do I Lower My Debt-to-Income (DTI) Ratio?
- Deal With Debt Like a Pro: Here’s How
- Need Extra Income? Check Out These 4 Methods
Credit scores and DTI ratio can be strong influences on the lender’s ultimate decision, but there is more to the formula. Lenders may consider additional factors that could boost your chances of getting your loan application approved. Here are a couple of additional things to be aware of:
Collateral: If you are applying for a secured loan, offer collateral of considerable value. For example, a vehicle may be more appealing as collateral than a computer.
Cosigner or co-borrower: You may want to consider applying with a cosigner or coborrower to strengthen your application. If you ask someone to cosign your loan, make sure they understand what the responsibilities are.
Most of all, try to keep a positive attitude toward getting approved for the loan. If you approach this process as a conquest rather than a challenge, you are already off to a great start. Good luck!
1 http: //www.consumerfinance.gov/askcfpb/1791/what-debt-income-ratio-why-43-debt-income-ratio-important.html
*This article has been updated from its original posting on October 21, 2016.