If you need some extra cash for a vacation or other expenditure, you may be considering getting a personal loan. Personal loans might allow you to borrow money without putting up collateral to secure the loan. Because these loans do not have collateral requirements, they normally carry higher interest rates. There are several steps that you can take to increase the likelihood that your loan application will be approved.
Figure out the type of loan that you need
If you are wanting to purchase a car, you will get a collateral loan against the vehicle. Personal loans, by contrast, are normally installment loans for specified durations that do not have collateral requirements. They are different than mortgages, credit cards or payday loans by their nature. Some people whose credit scores are not optimal may be asked to put up property in order to secure their loans. If you are asked to do this in order for your loan to be approved, you should be aware that you could lose your property if you fail to make the payments.
Keep your debt-to-income ratio low
Lenders look at your debt-to-income ratio when they make decisions about whether or not to extend loans to prospective borrowers. They want to see that you have a low debt balance relative to your income because that means you will be better able to afford your payments. It is a good idea to only borrow the smallest amount that you need so that you can keep this ratio at a good level. If you have a high enough income relative to your debts, lenders may agree to extend a loan to you even if you have some minor credit problems in your history.
Know your credit score
It is important for you to find out what your credit score is. The Consumer Financial Protection Bureau reports that credit scores may range from 300 to 850, and the higher your score is, the easier it will be for you to gain approval for a loan. The credit score is derived from several factors in your credit reports, including your payment history, your debt level, the length of your credit accounts, how much of your available credit you are using and others. Consumers are entitled to receive one free copy of their credit reports each year from Experian, Equifax and Transunion, according to the Federal Trade Commission. You can request your copies online at annualcreditreport.com or send your request by mail.
Take action to increase your credit score
Before applying for a personal loan, it may be a good idea for you to take action in order to increase your credit score if it is close to a higher category. Excellent credit is considered to be having a credit score of 760 or above. People who have good credit have scores that range from 700 to 759, and those who have fair credit have scores that range from 640 to 699. In order to increase your credit score, make sure that you always pay your bills on time and work on reducing your debt-to-income ratio. If you have a negative mark on your credit, waiting at least six months before applying for a personal loan and not being late on any payments during that time will help.
Know which type of lender to approach
Most large banks will not approve personal loan applications for people whose credit scores fall below 700. If they do, you can expect to pay higher interest rates. If your score is under 640, you will likely not be approved for a personal loan from a conventional lender. Try to avoid getting a payday loan, as these lenders can charge interest rates that may be as high as 400 percent annually. You may be able to find a lender that specializes in making personal loans to people who have low credit scores. If you are able to borrow, try to see if the lender will agree to report to your credit as it can help to raise your score if you make your payments on time.
Avoid disreputable lenders
It is a good idea to spend some time shopping around for an online lender. Online lenders may be able to offer lower rates because they have lower overhead. It is important for you to check the lender’s reputation before agreeing to do business with one. You can check with the Better Business Bureau to see how the lender is rated. You should also make certain that the lender you are considering is licensed in your state.
Personal loans may be a good option for you if you have an unexpected expense or a planned vacation. By taking the time to check your score and improve your credit, you can increase the likelihood that your application will be approved.