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7 Things Lenders Look For Before You Apply for a Personal Loan
Millions of Americans use personal loans for different reasons. These reasons include paying for unexpected expenses, consolidating multiple debts, and even making home improvements. According to TransUnion, the number of personal loan borrowers has risen from 15 million to about 20 million in recent years.
How Personal Loans Work
Personal loans are installment loans, which means you can borrow a fixed amount of cash and pay back a set monthly amount with interest over the loan term. Personal loans tend to range from about 12 to 84 months.
After paying your loan in full, your account will automatically be closed. However, if you still need more money, you can always apply for a new loan.
It is vital to know that loan amounts typically vary from lender to lender. The amount tends to range from $1,000 to $100,000, depending on different factors. Most of the time, the loan amount you are qualified for will be mostly based on your credit status.
What Lenders Look For In Your Application
Placing your best foot forward in applying for a personal loan can be pretty challenging, especially when you don't know what lenders need from you. Below are the factors that lenders look into to decide if you are qualified to take a loan or not.
Most lenders will look at your credit reports and credit score. It gives them an idea of how well you managed the money you borrowed in the past. If you have a poor credit history, the lender might look at your loan application as a potential risk of default. It scares them off as it puts them at risk of not getting their money back.
The higher your credit score, the better your chances of getting your loan application approved. To get better loan deals, the best credit score for a personal loan ranges from 700 to 800.
Income And Employment History
Lenders need to ensure that you can pay back the money they will lend you. So, they need to evaluate if you have consistent and sufficient income. Most of the time, the income requirements depend on the amount you borrow. Besides that, lenders will also require you to show steady employment proof.
The debt-to-income ratio is the percentage of your monthly debt compared to your monthly income. Lenders prefer borrowers with a low debt-to-income ratio. So, if you have a debt-to-income ratio higher than 43%, most lenders will reject your loan application.
You might still get a loan even with a high debt-to-income ratio. However, this needs to be accompanied by a good credit score and a reasonably high income. If you'd like to increase your chances of loan approval, lower your debt-to-income ratio by paying down outstanding debts asap.
Some personal loans might require you to pledge collateral. These loans are known as secured loans, and they usually have lower interest rates than unsecured loans.
The value of the collateral also determines how much you can borrow. For example, when you buy a car, you cannot borrow more than the car's current value. It is because the lender needs to be sure that you will repay your loan amount.
Some lenders would require you to give a down payment. The size of your down payment will determine how much you can borrow. For example, if you buy a car, paying more in down payment means you won't need more cash to borrow. In most cases, you can take out a loan without a down payment. However, you should know that you might end up paying more in interest.
Lenders would also like to see if you have any money market account or cash in savings. It assures the lenders that even if you experience a temporary setback, such as losing a job, you will still repay your loan.
Lenders would want to lend you money for a shorter loan term, with which you will more likely pay it back shortly. However, it is vital to know that a shorter loan term means a higher monthly payment.
If you pick a shorter loan term, you will pay interest for only a few years. On the other hand, if you choose to get a longer term, you will pay lower monthly payments and pay interest for a couple of years.
Many people resort to taking out personal loans to pay for their needs. So, if you plan to get one, it is best to know what lenders look for when it comes to approval. That way, you can prepare for your personal loan application in advance.
David Owens is a seasoned content writer specializing in finance - debt management, entrepreneurship, and business finance.
When not writing, he travels with his cat, Mellie.