How to get approved for a personal loan

You've looked at the situation and decided a personal loan is the right tool for the job. You may be approaching this with some hesitation, however, especially if past financial decisions or a few credit bumps are still weighing on you. That's understandable, but don't give up hope.

Instead, learn about the factors that go into getting approved for a personal loan, so you can feel more confident about applying. It's possible to get approved for a personal loan even after a previous denial.

Let's look at the big picture of how to get approved for a personal loan and how you can prepare today to boost your chances.

What determines personal loan approval?

Lenders want to know that you can repay your loan, and that you will. To figure this out, lenders will look at your personal finances and credit history before making a lending decision.

Approval factors for personal loans include:

• Credit. Your credit score and overall credit history.

• Debt-to-income (DTI) ratio. How much debt you already have as a percentage of your income.

• Income. Proof of your income from a job or self-employment.

• Loan amount. Smaller personal loan amounts are generally easier to get.

• Documentation. ID, proof of address, and financial documents, like your paycheck stubs and bank account statements.

Here's a closer look at each of these primary factors for how to get approved for a personal loan.

Credit history

Your credit history tells lenders about how you've handled credit in the past. Lenders check your credit reports and credit scores to see if you make debt payments on time and whether you're using a lot of your available credit.

Most lenders require a credit score of 580 or higher to get approved for personal loans. Some will have higher minimums, especially for the best rates. Other lenders specialize in bad credit personal loans, but they tend to cost more money in interest and fees.

Debt-to-income (DTI) ratio

Lenders won't give you a loan if they don't think you can afford to repay it. They use your debt-to-income (DTI) ratio to figure out how affordable your current debt is, and whether you could handle a loan payment on top of it.

DTI measures how much of your gross monthly income goes to debt and housing. Say you make $5,000 per month and your total debt payments, plus housing, are $2,000 per month. Your DTI would be $2,000 divided by $5,000, or 40%.

A DTI of 36% or lower is generally considered good and likely to get approved for a personal loan. Some lenders will also offer personal loans to people with a DTI up to 50%. A DTI over 50% could make it very hard to get a new personal loan.

Income stability

Lenders will typically want proof that you have reliable income. This could include recent paycheck stubs from your employer, bank statements with regular deposits, or recent tax returns.

Loan amount

How much you ask to borrow is a big part of getting approved. Lenders won't give you more than they think you can pay back. The larger the loan, the more the monthly payment will increase your DTI. If you ask for a loan that pushes your DTI over the lender's limit, you could be denied. Higher personal loan amounts might also require a higher credit score.

Documentation

When you apply for a personal loan, lenders will ask you for some documents to prove your identity and enable them to check your income and credit history. These could include:

• Driver's license or other government-issued ID

• Bank statements

• Pay stubs

• Proof of address such as a recent utility bill or lease

• Recent tax returns or 1099s if you're self-employed

Prepare your documents in advance before you apply for your personal loan. Many lenders make it easy to upload digital versions of documents.

How to improve your personal loan approval odds

A few changes in your debt management could make a big difference in improving your chances of approval for a personal loan. Here are quick tips and money moves to think about before you apply:

• Reduce DTI by paying off small debts. If your DTI is close to the lender's limit, try to pay off a few smaller debts before you apply. This could reduce your DTI enough to help you qualify.

• Boost your credit score. You could boost your score by disputing credit errors, paying down your credit card balances, and making on-time payments on credit accounts.

• Choose a smaller loan amount. A smaller loan means a smaller monthly payment that affects your DTI less. It may also have lower credit score requirements. Try to borrow only the money you need.

• Prequalify with a soft credit check. Many lenders will give you a chance to prequalify to check your approval chances and estimated rate. While not a guarantee of approval, prequalification could help you focus on lenders more likely to approve your application. Choose lenders that use a soft inquiry for prequalification, as soft inquiries don't hurt your credit. Achieve Personal Loans could be a good place to start.

• Add a co-signer or co-borrower, if allowed. If you and someone you trust share a financial goal, a second applicant applying as a co-borrower could help. A co-borrower shares the loan funds and repayment with you. Another option is a co-signer who is equally responsible for the loan but doesn't share the funds. Either way, the loan affects both people's credit. Before you ask someone to co-sign the loan, agree on a clear repayment plan together.

"I spent almost six years running analytics for our lending team. The pattern that surprised people the most was how often a good credit score wasn't enough on its own. The applicants who came back and got approved usually did something unglamorous first: they improved their DTI. They paid down a card or two, so that less of their paycheck was already spoken for." Aman Lather, Achieve General Manager

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Example: How to improve personal loan approval chances

Alex has a 690 credit score, $1,845 in monthly debt including housing costs, and earns $4,500 before taxes each month. That makes Alex's DTI 41%, a little too high for some lenders. Alex might get denied for a personal loan.

One of Alex's monthly debt payments is a $1,000 credit card balance with a $50 monthly payment. If Alex can pay off that balance and ditch the $50 payment, their DTI ratio drops to just under 40%. Paying off the balance also lowers Alex’s credit utilization. This one simple move could increase Alex's chance of getting approved for a personal loan.

What credit score helps you get a personal loan (and what if yours is lower)?

In general, the higher your credit score, the better your chances of getting approved for a personal loan. However, credit score isn’t the only factor lenders look at during the application process.

There's also no one credit score number that guarantees personal loan approval. Instead, a range of credit scores could get you approved, depending on your overall qualifications. Your credit score has a big influence on your interest rate, too.

What credit score do you need for a personal loan approval?

Lenders generally prefer a credit score over 580 for personal loans. The exact credit score needed for personal loan approval will depend on the lender and your other qualifications.

If you have a lower credit score, you could still get a personal loan. You might have to pay a higher interest rate or other fees, apply with a co-signer, or accept a smaller loan amount.

You could also wait to apply for a personal loan and improve your credit first. Try these tips to boost your credit score quickly, potentially within a month or two:

• Check your credit report and dispute errors. Go to AnnualCreditReport.com for free weekly credit reports from all three credit bureaus (Equifax, Experian, and TransUnion). Dispute any errors that might be hurting your credit score unfairly.

• Reduce your credit utilization. This is how much of your available credit you're using. If you can, pay down any cards that have a high balance relative to the credit limit.

• Become an authorized user. If you have a limited credit history, having someone with good credit add you as an authorized user could boost your credit score. Check that the card issuer reports authorized users to the credit bureaus, as not all do. Make sure the cardholder has good payment habits, because if they make late payments or carry a high balance, that could hurt your credit, too.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Prequalification vs. full application

Many lenders offer prequalification to find out which loan amounts, interest rates, and terms might be available for you. Prequalification typically uses a soft credit check that doesn’t impact your credit score. A prequalification offer isn’t a guarantee of approval, and the final loan terms could change.

Prequalification doesn't involve a full loan application. Approval for a personal loan requires you to apply, provide documentation, and go through a hard credit check. A hard credit check affects your credit, although the impact is typically minor. A single hard inquiry normally takes a few points off your credit score and affects your score for 12 months.

What to do if your personal loan application was denied

If you get denied for a personal loan, the lender must send an adverse action notice to explain why or tell you how to request the denial reasons. Lenders typically send adverse action letters by mail.

A few common reasons for denial of personal loan applications include:

• DTI is too high. If your DTI ratio is higher than what the lender looks for, you might be turned down for a personal loan.

• High credit utilization. A large percentage of used credit, such as maxed-out credit cards, could result in your personal loan application being denied.

• Credit score is too low. A credit score that doesn’t meet the lender’s requirements could cause you to get denied.

• Income is too low or couldn’t be verified. Your income is a key factor in your ability to pay back a loan. If it’s below what the lender looks for or if the lender can’t verify it, then your application could be denied. Inability to verify income is a common issue with self-employed loan applicants.

• Thin credit. If your credit history is thin, meaning you don't have much credit history, you might need to establish and build your credit before you can get approved for a personal loan.

• Recent delinquencies or defaults. Recent negative items on your credit report, like delinquent debt, collection accounts, or defaults on loans, could mean a denial.

Once you know the reason for getting denied, you can get ready to try again. You might need to spend some time and effort to fix the issues. Try to raise your credit score, reduce debt, or increase your income before you apply again. When you understand the application process and prepare in advance, you could improve your chances of getting approved for a personal loan.

Ready to get started? Check your rates through Achieve Personal Loans today.