It’s disheartening to apply for a loan and to not be approved. When you go through the application process, you want to know that you’re sharing your personal information and taking a ding on your credit score for a solid result.
If you’re hesitant about applying for a personal loan, it’s important to know that there are a range of loan options to suit almost every applicant – including loans for those with poor credit scores. But while there may be loans available, loan terms can vary by applicant. Not only do you want to be approved for a personal loan when you need one, you also want to be sure that you’re getting the best possible terms for that loan.
Understand the loan requirements
The easiest way to be rejected for a new personal loan is to simply ignore the actual loan requirements. If you’re working with an online vendor, the requirements for loan approval may be relatively simple. You would need:
– Canadian residency, with ID to prove
– To be at least 18 years old
– An active bank account
– Evidence of a steady income
– Fair to good credit score
If you can’t show any of those requirements, you’re not likely to be approved for a personal loan. Lenders require a bank account so that funds can be automatically deposited and transferred. Even if you have a high credit score, many personal loans will still request information about your income to demonstrate that you can pay the money back according to the loan terms.
There are many ways to demonstrate a steady income, and you are not limited to a traditional paycheque. It may be possible to take out a personal loan using government benefits, pensions, or disability payments since those may be considered a steady income stream as well. You’ll need only show that your monthly income – regardless of source – has longevity and is dependable. Demonstrating your creditworthiness to a lender can always help with your chance of being approved.
Review your credit report
Many financial institutions offer credit reporting. If you haven’t taken advantage of these services, this may be the time. Before you apply for a new personal loan, you should know your own credit score. Additionally, you should know the factors that are going into that score. While not every personal loan uses credit scores in their application process, many do offer the best rates to those who can demonstrate a reasonable credit score.
Start by signing up through your financial institutions for ongoing credit monitoring. It is likely a free service offered by your bank. Then, order a copy of your credit report. Take the time to read every word of the report and look for discrepancies.
Your credit report should include all your various lines of credit and loans. Check to be sure that nothing has been opened without your permission and that there aren’t mistakes on the report like a report of a late payment or repossession that didn’t occur. If you do find errors, dispute those errors with the credit bureaus to have them removed from your report. Once the errors are resolved, your credit score should go up, improving your chances of loan approval.
Improve your debt-to-income ratio
Your debt-to-income ratio is an important part of your loan application process, especially if you don’t have a strong credit score. The debt-to-income ratio is just what it sounds like – the amount of debt you have compared to the amount of income you have every month. Lenders calculate your debt-to-income ratio using the financial obligations you already have and the income you report on your application.
If you are already spending a large percentage of your monthly income on credit card payments, rent, car payments, and more, lenders may not be comfortable with loaning you more money. The higher your existing monthly payments, the less money you must pay back other loans, creating a situation that is more likely to fail – at least according to the banks.
This can be especially frustrating for those who are hoping to get a personal loan for debt consolidation. In that scenario, you’d replace the more expensive credit card payments with a new set monthly payment but getting approved for a new payment can be a challenge.
If you have a high debt-to-income ratio, there are two ways to resolve the situation – improve your debt or improve your income.
If you can’t do much about your debts, you can likely do something about your income. Take on a second job for a few months. This not only boosts your income when it comes to loan applications, but also provides some extra cash that will help you pay down your debts, effectively attacking the problem from both sides of the issue.
If adjusting your income doesn’t seem feasible, make a pointed effort to reduce your debts instead. Cancel cable for a few months. Downgrade your cell phone plan. Cook simple meals for a month to free up some grocery money and use these funds to pay down debts. Once your debt-to-income ratio is more balanced, you should have greater confidence in your loan applications.
ALSO READ: How to Improve Your Credit Score