Sometimes we fall into situations where our savings just won't solve our financial situation. In cases like this, a personal loan may be the answer. Also known as an unsecured loan or signature loan, a personal loan may fill the need to borrow as little as $1,000 or as much as $100,000. And, a personal loan won't require collateral or security such as a home or vehicle. Instead, approvals for personal loans depend on you as a borrower, and how likely you are to pay back the loan. If you think you may need to apply for one of these loans in the future, here are a few tips on how to improve your chances of getting a personal loan.
Strengthen Your Credit Score
Since personal loans depend heavily on your credit history, credit score, and income instead of on security, improving your credit score may boost your chance of getting an approval. Also, since the interest rate you'll be offered is related to your credit score, it makes sense to work on your score. According to LendingTree data, while borrowers with credit scores in the 580 to 619 range may be approved for personal loans, their median interest rate on a four year loan was 30.02 percent. However, borrowers scoring in the 760 to 850 range were offered a median rate of 8.18 percent. Use these credit score improvement tips from LendingTree to work on strengthening your score.
Show a Steady Income History
Since your personal credit and income history reflect the strength of your personal guarantee on the loan, it's important to provide documentation that you have a history of verifiable consistent income. If you're an employee, expect to provide your pay stubs and W2 tax forms. If you're self-employed, you'll likely be asked to show your tax returns to verify your income.
Your income also comes into play during the calculation of your debt servicing ratios. These ratios look at how much of your income goes to supporting all of your payments, including mortgage/rental payments, credit card and credit line payments, as well as other loan payments and obligations. The ratios affect your credit score, your interest rate, and potentially your loan approval.
Get a CoSigner
In some cases, a borrower's income isn't high enough to meet the minimum requirements, or to support the debt they already have. In these cases, and if your credit history and credit score are poor, a cosigner may improve your chances of getting approved for a personal loan.
A cosigner is a person, (usually a close family member or friend) who promises to pay back the loan in the event that you do not. They must also provide information regarding their income, and agree to a credit check. When you apply for a loan with a cosigner, the lender evaluates the cosigner's credit score and other information to not only approve your loan, but also to determine your interest rate. So using a cosigner with great credit may help you to save money as well as improve your chances of a loan approval.
Ready to shop and compare personal loans in minutes? Use LendingTree's handy free Loan Comparison Tool to find the best loan option for your situation.