You can use a personal loan to consolidate debt or pay significant purchases like a house renovation or a wedding. They allow you to work with a single lender for a number of projects, simplifying your funding process.
Applying for one will help you start cleaning up your finances. And by submitting personal loan applications to possible lenders, you can attain a much stronger position to support your financial objectives.
Yet, there are many factors you should consider before applying for such a loan. Here, we will run you through eight critical factors to consider in personal loan applications.
Your credit score is one of the most important factors that lenders consider when applying for loans.
You might be a high-risk borrower if you have bad credit. This will usually scare lenders away or force them to challenge you to produce additional assets to be a more attractive loan prospect.
When it comes to credit ratings, the higher, the better. Because lenders base your eligibility on many variables, they rarely mention their minimum credit score requirement in the application.
There are a few things you can do to improve your credit score in a short timeframe.
Many popular lenders use FICO credit scores, and five distinct factors determine them:
- New credit inquiries (10 percent)
- Credit mix (10 percent)
- Age of credit accounts (15 percent)
- Credit usage (30 percent)
- Payment history (35 percent)
Payment history is the most important factor considered when lenders look at your credit score. That’s why it’s preferable to have paid-off debts, such as school loans, remain on your credit report. It works to your advantage if you pay your bills appropriately and on time.
To get into good habits of paying your bills on time, you can automate bill payments from a bank account. Also, it’s generally a good idea to get more organized by making a file for your bill payments. Furthermore, a good tip is to set up alerts on your phone to let you know when bills are due to be paid.
Alternatively, you can charge all of your monthly payments via credit card. To prevent interest costs, this plan implies that you will pay the balance in full each month. By taking this approach, you may find that it makes bill paying easier and boosts your credit score by logging all of your on-time payments.
Down Payment Size
A downpayment may be required depending on the size of your loan. This is a lump-sum payment made to the lender that lowers your monthly payments.
A substantial down payment demonstrates that you are financially secure enough to invest a significant amount of money in your loan.
If you put down a tiny deposit on a loan, you’ll almost always end up with higher interest rates and a more extended repayment period.
If you intend to buy a house, lenders prefer borrowers who take out small mortgages on their homes. This is because they have a better chance of selling the house for more than the loan amount if the lender has to foreclose.
Not only that, but lenders may believe you’ll be more motivated to keep paying if your down payment is at risk if the lender forecloses. So, if you have bad credit, you might be able to increase your desirability in the eyes of lenders and get better loan terms if you put down more money upfront.
Furthermore, failure to secure a loan is a significant reason for house purchases falling through. Therefore, it’s simpler to get a loan if you put down a substantial down payment.
Value of Collateral
Non-liquid assets are referred to as collateral. These are high-value objects that you’re willing to hand over to the lender if you can’t make your loan installments.
Individuals might use their car or house as collateral to demonstrate that they have sufficient value or financial support to repay the loan, even if it is not in a liquid form like cash on hand.
Some lenders won’t let you borrow more than your collateral’s current worth. If you use your home as collateral, for example, you won’t be able to get a loan for more than the current value of your home.
When filling out your loan application, you’ll want to show that you’ve worked hard in the past. Your work history suggests you’ve either been with a company for a long time. Or, it can show many job changes in a short period.
If you switched jobs or companies, you would not be penalized. If you have a history of being fired and not keeping down a job for an extended time, your application will be less favorable.
Your previous employers, salary, job titles, and dates of employment will be displayed in your employment history. Lenders want to know that you’ll be able to repay your loan while maintaining a steady stream of income.
Lenders want assurance that borrowers will be able to repay their loans. You can show your lender that you have the financial means to make regular payments on your loan by demonstrating a sufficient and constant income stream.
If you have a high income, you are more likely to choose a more favorable low-interest or short-term payment plan. This is since you are a low-risk borrower.
Your debt-to-income ratio is calculated by comparing your monthly debt commitments to your monthly income. This percentage allows lenders to assess how much of your income is flexible and allocable to your payment plan.
If your lender is ready to take on a high-risk customer, you may be qualified for a personal loan even if your debt-to-income ratio is low.
Loan Term Length
The lender can forecast your financial status for the following few years based on your loan application. Lenders are more comfortable lending money for a short period since you are more likely to repay them.
The interest rate may differ depending on the term length of your day. Longer loans typically carry higher interest rates. This tendency is also influenced by the other aspects of your loan application.
Your Liquid Assets
You can turn a liquid asset into cash in a relatively short timeframe. Cash, mutual funds, accounts receivable, and quick cashable investments are examples of liquid assets.
Lenders prefer to know that you have some cash or savings on hand. This way, you could immediately liquidate if you needed to make a monthly payment or a down payment on your personal loan.
The ability to demonstrate your liquidity to a lender allows them to feel comfortable lending you money. This is because they know you’ll be able to keep up with payments. If you don’t have a lot of cash on hand, your lender may require you to pay a higher interest rate so that they don’t have to risk lending you money.
How to Submit Personal Loan Applications
There are many options for loans and you’ll want to compare several lenders to locate one with the best personal loan interest rates. To find out what personal loan programs are available, contact your bank, local credit unions, online lenders, or other major banks.
To apply for your loan, you must first qualify. This means you’ll have to submit a credit report and answer questions regarding your loan eligibility. You’d like to compare loan programs based on their loan terms, fees, and interest rates.
Once you’ve found a lender you wish to deal with, you’ll need to fill out a detailed loan application. Lenders may include the following items in this loan application:
- A credit check/report
- Personal information
- Income verification
- Bank Statements
Although many lenders have a straightforward application process, you can tailor your application to better appeal to a lender. If you provide all of the required documents, you may receive a response to your loan application within a short period.
Personal Loan Applications Made Easy
We’ve now looked at many of the factors that lenders will consider when applying for a loan. Once you know these factors, you can focus on improving them so that you’re looked on more favorably by lenders.
Your credit score is one of the most important things to consider with personal loan applications. And the great news is that you can improve it within a year or even months if you take the proper measures.
So thanks for checking in, and we hope you get the loan you require. If you have the time, please check out some of our other informative articles on our blog.