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You’ve decided that a personal loan is the best choice for you. Now you need to understand if you qualify for one and how to start applying. You’ve come to the right place. Read on to learn about personal loan qualifications and steps you can take to better your chances for approval.
There are a few factors that lenders will look into to determine your eligibility as a borrower. For starters, you need to be at least 18 years or older to qualify for a personal loan in the United States. If you’re younger than this, you will require a co-signer. In some states, you may have to be 19 or 21 without a co-signer. Co-signers may be a good idea regardless if you are over 18 if this is your first loan. Young borrowers likely have low incomes and no credit history. Obtaining a personal loan with a co-signer can help build your credit history, lower your interest rate and raise your credit score. Your location is another consideration. Not all banks or lenders will lend to people nationwide. Check their websites to learn more about this information. Online-only or peer-to-peer lenders may also have restrictions based on location.
Income and assets
The biggest factor of consideration for a personal loan is your income and employment status. You’ll need to show regular, steady income and proof of employment. If you are receiving government benefits, disability payment, alimony, or child support there may be different standards. If you are self-employed, you’ll typically have a stricter application process. You may also need to show twelve months of income to qualify. Borrowers typically only need to show an annual income of $20,000 to qualify for a small personal loan. Businesses will usually need to show a minimum of $50,000 or more. No matter your income, the amount of debt you have will affect your qualifications as well. If you have a high ratio of debt to income your interest rate may be higher and you’ll qualify for less money. The number of assets or collateral you have will also be a factor. Liquid or non-liquid assets also determine your eligibility. Liquid assets are cash or equities in non-restricted accounts. Collateral are items that the lender can potentially obtain from you should you default on your loan. If you have a lot of liquid assets such as a high balance in your savings and checking account, you are far less likely to default than someone who doesn’t.
How your credit comes into play
While each lender has their own set of standards, you will always look like a less risky candidate for a loan if you have a higher credit score. Your credit score is essentially a snapshot of how likely you are to default on a loan. The effects of a low score will impact a lot more than just your loan eligibility. Your interest rates, job prospects, housing, and eligibility for other lines of credit or services can be affected. In the United States, FICO is the credit scoring model. FICO uses five factors to determine your eligibility.
These five factors are your credit utilization ratio, repayment history, length of credit history, credit mix, and new credit. A FICO score will range from 300 to 850. A super-prime borrower has a score between 740 and 850. They will receive high borrowing limits and low-interest rates. A prime borrower has a score between 680 and 739. They will receive low-interest rates and qualify for relatively high borrowing limits. A near-prime borrower has a score between 620 and 679. Traditional banks tend to restrict near-prime borrowers. They will have higher interest rates and lower borrowing limits. They may even be avoided by traditional banks altogether. Online banks will usually still lend to near-prime candidates. Sub-prime borrowers have scores below 619. Most banks will avoid lending to sub-prime candidates. If an online bank does lend to a sub-prime borrower, they will have low-principal loans and a high APR. The bottom line is, the higher your credit score, the more you will qualify for and the lower interest rates you’ll have.
Improving your credit score
Before you apply for a personal loan, you should run your credit report. You are entitled to one free credit report by the government per year. This will give you a better idea as to what your credit score is and where you can improve before you apply. If your credit needs some work, there are few things you can do pretty quickly to improve your score. Note that anything in collections or serious default will remain on your credit for up to seven years. A few things you can do to raise your credit score is to lower your credit utilization ratio.
Let’s say you have a $5,000 limit on your credit card and have a $4,800 balance on your credit card. This is a high ratio. Pay off as much of your credit card as possible to get this down. The most important thing you can do is to pay all of your bills on time. This has the most bearing on your credit score. Pay your revolving credit lines in full whenever you can. You’ll need to do this for some time before applying for a personal loan. They will want to see a pattern of steady payments. The longer you’ve had an account on your credit, the better off you are as well. Having a long history of making payments and keeping low balances the better, It’s also good to have a variety of different types of credit. Having a car loan, a mortgage, and a credit card, for example, shows a good credit mix. In short, the best way to improve your chances of getting approved is to stay on top of your credit, keep your score high, make your payments on time and keep your debt to income ratio low.