If a financial emergency strikes when your savings are low, what’s important is getting the cash you need quickly. Every second counts when you need money for an unexpected emergency expense.
At that moment, the last thing you need is having your application denied. It may bring your financial fix to a screeching halt, and it may take some time to get back up to speed with another application.
If this has happened to you before, did the question about why you’re not getting approved for a loan leave you scratching your head?
It shouldn’t! While it may not show up in most FAQ about borrowing money online, the reason why a lender denies you a loan should be made clear in your declination letter. There may be just one thing standing in your way, or there could be several things taking you out of the running.
One thing’s for sure, it’s not a popularity contest. Lenders tend to deny customers due to specific things that put you at odds with their official eligibility criteria — not because they don’t like you.
Making sure you match these criteria may improve your chances of getting approved for a personal loan.
So how do you go about doing that?
Well, when it comes down to it, there may be no way to guarantee your approval. But at the very least, these good money management tips may put you in a better position — whether it’s your first time applying or second.
1. Make Sure There Are No Mistakes in Your Application
Occam’s Razor suggests the simplest answer to a problem is usually the right one. And what could be simpler than an honest mistake?
A lender may automatically deny an application that shows incorrect financial account numbers or spelling mistakes.
2. Make Sure You’re Eligible
Speak with your lender or go online to see what they expect of their customers. These criteria tend to cover things like:
- Age
- Bank account information
- Credit history
- Location
Lenders need to make sure that you’re old enough to borrow, you live in the state where the lender is certified to lend, you’re creditworthy, and you have an active bank account to receive the funds.
Each lender may have its own list, so it’s always important to check what you need to qualify.
But that’s not all.
It’s not just about finding a loan where you meet the mold. A good idea would be to flip the script and make sure your lender has what it takes to satisfy your financial needs, too.
Timing
How long a lender takes to grant you a loan (if you’re approved) and lend the money to you is an important detail you shouldn’t overlook.
Some traditional institutions may rely on processing methods that may take some time or weeks to review your application. Online loans from online direct lenders, on the other hand, may take a fraction of that time.
An online direct lender uses their online platform to their advantage. With online applications available 24 hours a day, 7 days a week, much of the initial application is automated.
All in all, it may take minutes to be approved, and you may receive your cash as soon as the next business day. That turnaround comes in handy during an emergency. To learn more about what else sets a direct lender apart from other options, click here.
Security
With every application you fill out, you share things like your contact information, financial account numbers, and credit data. All of these could be considered hot commodities when it comes to fraudsters.
You need to make sure that you share this data with lenders that prove they’ll protect it with appropriate security measure. To protect your personal information online, choose a lender that values your cybersecurity.
3. Choose the Right Product for Your Needs
The term “personal loan” has a broad definition. It may describe a short-term online loan like an installment loan, or it could define a long-term mortgage.
There’s not much that these two products share. How much you can borrow, at what interest rates, and your repayment terms vary drastically depending on which one you use.
More importantly, they each have a specific use. You can’t substitute one for the other.
Applying for a first-time mortgage to cover a small, unexpected auto repair won’t work. Neither will using an installment loan to buy a piece of property.
While this may be an exaggerated comparison, it illustrates an important point - there are specific loans for specific purposes. Choosing the wrong one for your needs may automatically take you out of the running.
4. Understand How Your Credit Score Factors into It
In many cases, getting approved for a personal loan depends on a special three-digital number.
No, it’s not the area code of your phone number. What we’re talking about is your credit score.
This score puts a value on your creditworthiness, or how the lender concludes the likelihood you’ll repay them in the future. In other words, it lets those lenders that check your credit determine if you’re safe bet or an unnecessary risk.
If their criteria is met, they’ll likely grant you a loan.
Your score is determined by your past borrowing behavior. While each credit scoring model will use its own unique calculations, there are generally five factors that play a part in every score:
- Payment History: On-time payments look good to future lenders who are concerned about your ability to pay their installment loan – or other types of loans – back.
- Amounts Owed and Carried Over: A bigger debt load doesn’t automatically result in a low score as long as you keep these accounts in good standing. But, if the amount of debt you owe keeps going up, you may have a harder time making timely payments.
In addition to making timely payments, another important component of your amounts owed is your credit utilization rate. The credit utilization rate of a line of credit typically has more of an influence than the balance of an installment loan. This shows how much of your available credit you use month-to-month.
- Length of Credit History: Consumers with scores of 800 and above tend to have a history that goes back about 25 years. Scoring models favor older accounts simply because they tend to show more information about your payment history. This works in your favor, provided of course, it shows your accounts are in good standing.
- Credit Variety: The type of accounts you have in your name may play a small part in your score. Having a variety of accounts in good standing reveals more borrowing information than if you only had one installment loan, for example.
- Credit Inquiries: Getting a personal loan may involve a credit check that shows on your report. Multiple inquiries into your credit over a short period may have an impact on your score.
All this information gets recorded in your credit report. If you have mostly positive entries here, you’ll probably have good credit.
Good credit opens financial doors, making it easier to qualify for a variety of products at the best rates.
A report pockmarked by bad entries, however, may do damage to your credit. The lower your score is, the less selection you may have when getting approved for a personal loan.
What is a “Perfect” Credit Score?
Generally, most consumer credit scores fall somewhere between 300 and 850, making 850 the highest credit score possible.
But do you need to boast the highest credit score to get the best borrowing options? Not according to FICO.
The scoring company reveals that a score of 850 is no different from any score that falls within the “exceptional” range. As long as you have a score of 800 or above, you’ll have the same options as someone with a “perfect” credit score.
It’s when you slip below “exceptional” that your selection may begin to taper off until you have fewer options that may accept bad credit. `
While some lenders may have a credit cut-off, other direct lenders may not. If you know you have a low score, you may want to click here to learn more about direct lenders and what they do.
Understanding how credit score affects you can be important. Seeing what a low score does to your chances of getting approved for a loan may be the inspiration you need to do something about your credit.
How to Build Credit Fast — is it Possible?
Building up an impressive report and score is possible, but it may take longer than you expect. Generally, you’ll have to wait for any bad entries to fall of your file. This usually takes seven years unless you’re recovering from bankruptcy. In that case, it may take a decade.
In the meantime, you’ll have to keep any more bad entries from joining your file. Look at the categories above to see what you can do to start adding good entries instead.
Until you see your score begin to climb, choose a product that’s available for your profile. There’s no point in applying for a loan that requires excellent credit when you know you have a subprime score as you may be wasting your time.
Everyone wants an excellent score, but may not always be possible. Reaching or maintaining a perfect credit score may be a challenge if you face unemployment or serious medical issues.
Here at MoneyKey, we offer installment loans that may be available even if you have a low score. While we may look at your score, we analyze other financial factors when reviewing your request, too.
To see what those may be, check this out for more information about installment loans.
5. Borrow Only What You Need
Don’t take out more than you need. Don’t take out more than you can afford to pay back.
These are two cardinal rules of borrowing, no matter what type of loan you end up getting. Breaking them may spell doom for your application.
Why? Because some lenders may base their decision on your ability to repay the loan.
If they do, they may look a metric called your debt to income ratio (or DTI, for short). DTI reveals how much of your monthly gross income you use to pay current debts.
Here’s a helpful calculator to find out your DTI.
Typically, this ratio is expressed in a percentage. The higher this percentage is, the more of your paycheck is tied up paying off bills. This shows that you have less cash available to put towards future loan repayments.
Lenders consider debt-to-income ratio much like they may review your credit score and history. By giving insights into how your money is already being spent, it helps them assess the kind of borrower you may be.
DTI may also help some lenders determine if what you’ve applied for is affordable considering your current obligations.
DTI Levels: What it Means
High
More of your money goes towards regular debt payments, leaving less wiggle room in your monthly budget. This may make it challenging to take on additional bills until you pay off existing debt.
Depending on how high your DTI is, it may signal to lenders that you have too much debt for your income to handle, so they won’t grant you another personal loan.
Low
With fewer debts, less of your money is devoted to debt-related bills. A low DTI signals to lenders that you may have more expendable cash in your budget, which suggests you may find it easier to cover future debt repayments.
The lower your DTI is, the more likely a lender will approve you for a personal loan.
What is a High Debt to Income Ratio?
When it comes to DTI, 43 percent is an important number. It represents the highest debt to income ratio you may have and still qualify for a Qualified Mortgage.
But lenders of other personal loans may have a lower threshold. This is why you should always aim for a low DTI.
The closer your DTI gets to zero, the better it looks to all lenders.
How to Improve Your DTI
Improving, or lowering, your debt to income ratio relies on increasing your income while decreasing your debt.
Making a meaningful impact to this number involves:
- Cutting fixed and variable expenses from your budget
- Paying down existing debt
- Boosting your income
Admittedly, this is a long-term solution that may not be practical when you need money in an emergency.
This is why asking for the right amount of money is so important. Lowering your asking amount may affect how big your payments will eventually be. Lower payments may be easier to juggle with your current obligations, even if you don’t have the time to tackle your DTI.
How Do You Decide What You Need?
As an example, an installment loan tends to arrive as a fixed amount upfront. Making sure this amount works for your needs and budget relies on a few steps. Here are some questions you should ask yourself before you apply.
1. Why Are You Borrowing?
Answering this question is easiest when you know your goal. If it’s a $450 emergency auto repair that you need help covering, then you have your answer. But it might not be as clear if you have several emergencies to tend to at once.
Take the time to figure out what you need an installment loan for, and what the minimum you can borrow is while still satisfying your needs.
2. What Does the Lender Offer?
Many lenders will have both minimum and maximum lending amounts, which create the limits of how much their customers may borrow.
These limits may vary drastically depending on a lot of factors, including the financial product, your lender, your location, and your credit score.
If you want less or more than the average lender may be willing to give, you may have to look elsewhere for help.
3. What is the True Cost of the Loan?
Your loan agreement should make it clear how and when you’ll be expected to pay back on your personal loan. It should itemize the size and date of your payments, while breaking down the following info:
- how much goes towards your principal (the amount you borrowed)
- how much goes towards interest and other finance charges
The more you borrow, the more interest will have an affect on your monthly payments as well as your total loan costs.
Understanding how these fees impact your repayments and the length of your term may help you determine if this is a practical option for your situation. If it isn’t, see if you can get the loan by borrowing less to avoid a high amount of interest.
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What Do You Need to Do?
Getting approved for a personal loan involves more than a simple yes or no. There are a lot of factors that impact your chances of being granted the cash you need.
Find out what you need to do to spruce up your next application. Given enough time, you may be able to address all the factors covered here today to improve your chances of hearing a “yes”.
But if an emergency strikes out of the blue, you may not have the time you need to make a meaningful change to your finances. In which case, get in touch with us. Getting approved for a personal loan may still be possible.
