Getting Approved for Personal Loans

The personal loan application process doesn’t take much longer than the credit card application process, but the chances of a personal loan application getting rejected are much higher because the bank is taking a bigger risk.

With a credit card, the bank grants you a line that you can use any amount of at any time, and you only owe payment and interest on the portion of the balance you use. But with a personal loan, which can range from hundreds of dollars to thousands, the bank gives you the lump sum up front, and you pay it back with interest on a monthly schedule over 1-5 years. The chances of default on a personal loan are much higher, and the consequences for both sides far greater.

Here are essential steps to take before you apply, in order to maximize your chances of getting approved:

– Verify your credit status with a free credit report at annualcreditreport.com. You should always do this before applying for any financing, but it’s especially important to make sure you’re aware of every item reported to your credit history, and to resolve any differences. I recommend annualcreditreport.com rather than the popular and advertised freecreditreport.com because annualcreditreport.com has no strings attached, while the other site requires enrollment in a pricey credit monitoring service that’s difficult to cancel.

– Make sure you have a credit score in the 650-700 range, and be sure you have a recent history (up to a year) of having paid your bills on time. Granted, you won’t have a score in the 650-700 range without having paid all your bills on time. But if you have any history of missing payments, you want to maintain a perfect record of paying every bill on time for at least a year, and make sure to pay down or otherwise consolidate any credit balances to rebuild your credit score.

Transferring a balance to another card, even if it doesn’t save you much, is one easy way to help, since reducing any credit card balance to $0 gets reported positively to the bureaus, even if the balance was transferred. I suggest you not do this more than once or twice in a while, because you pay a hefty transfer fee (typically 3% of the size of the balance transferred: for a $3000 balance, that’s $90) every time you do. But really, the best way to do this is to pay your bills on time and pay more than the minimum payment on your credit cards each month.

– Make sure you have a specific purpose for the loan. Telling a bank, “Oh, I just want the money,” will produce a quick rejection. They want to see you have a concrete purpose for the money: to consolidate bills, to pay for a vacation or wedding, to buy a car. They want to know you’re not some irresponsible fool who’s just going to blow through the money, because such a person might not pay the balance back. Having a plan indicates you’ll also have a budget plan that will ensure repayment.

– Make sure you can show you have the means to pay the loan back, such as a stable job with enough disposable income. This is why they ask for how much you make every month. Lenders generally want to see that making payments won’t eat up more than 10-20% of your income. This is also why they ask for how much you pay in rent or mortgage: they want to see that you have enough income left over that making the planned monthly payment won’t leave you in a tight financial situation. If you cut it close, that indicates that they won’t receive payments from you the first time something goes wrong. A stable financial situation shows them that you’ll come through, rain or shine.

– Try to get a personal loan with a local bank or credit union, rather than a big bank. The big banks receive tons of applications, and thus can afford to be real selective about who they approve. Even if you’re otherwise qualified, they may turn you down, knowing they can use the financing to finance businesses and wealthier individuals who will make good on the loan and come back for future business. It’s crass, and it’s the natre of the marketplace.

A local credit union, however, is more customer oriented, and willing to work with an individual. Even if your credit is not up to snuff, the credit unions have the flexibility to work out an arrangement that can get you the personal loan they need, since they are not bound on high by corporate interests. Helping consumers is how the credit unions grow their business, so they’ll be more willing to accept you than the big banks.

None of these steps are absolutely necessary for acceptance on a personal loan application, but if you suspect that you’re on the cusp between acceptance or rejection, or your credit history makes you a question mark, it doesn’t hurt to prepare by getting your credit and finances in as much order as you can before you apply. And even if you’re not planning to apply for a personal loan anytime soon, it doesn’t hurt to take these steps now to improve your credit standing, so that when you finally do need to apply, you have the foundation to get easily accepted.

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