There are a few compelling reasons wannabe borrowers hope to get approved for a loan their first time around. First of all, it’s easier because it means you only had to do the paperwork once. It also means your credit report will contain just one hard inquiry — which can temporarily ding your score — rather than several. Getting approved for a loan also signifies your financial situation is, to a degree, solid enough to help you meet your current goals.
Want to improve your chances of getting approved for a loan? Here are six tips to keep in mind.
Check Your Credit Score Regularly
Under federal law, Americans are able to get a free credit report each year from the three main reporting bureaus: TransUnion, Experian and Equifax. Rather than checking them all at once annually, do so every quarter to keep a closer eye on your history. Although it’s normal for these reports to differ slightly by bureau, taking a cyclical approach can help you spot errors and identify theft more promptly so you can take action.
As Business Insider notes, mistakes do occur on credit reports that can affect your ability to qualify for financing. Checking often and disputing errors is the best way to keep your history blemish-free so you’re likelier to get a loan.
Work to Improve Your Credit Score
Know what factors make up your credit score — and which actions can help raise it vs. hurt it. Aim to use 30 percent or less of the total credit available to you and stay at or below 30 percent of each credit card’s limit. Consider keeping old accounts open, as they lengthen your history. Do whatever you can to avoid missed payments and take care of any late payments you owe.
Improving your credit score rarely happens overnight, but it’s a major factor lenders consider when approving or denying your loan application.
Optimize Your Debt-to-Income Ratio
If you owe a lot of money compared to how much you make, you appear riskier to lenders. Your so-called debt-to-income ratio (DTI) expresses this figure as a percentage. To find DTI, divide your cumulative debts and living expenses by your monthly gross income. Many experts advise aiming for a DTI of 36 percent or lower.
If your DTI is higher, the next step is paying down debts and/or boosting income to make yourself a more appealing loan candidate.
Understand Lender Income/Credit Requirements
The next step is understanding lender requirements for income and credit. Online research is your friend here. You’re trying to find a lender well-suited to your circumstances and needs.
Some lenders have income requirements for borrowers. Others require applicants to meet a certain credit threshold. Don’t fret if you fall short of these standards though. There are also lenders out there offering debt consolidation for bad credit, and other more flexible personal loans. Just be aware you may have to pay a higher interest rate to offset lenders’ increased risk.
Apply for the Smallest, Shortest Loan You Can Afford
Avoid asking for more money than you need and/or stretching out your loan term longer than it needs to go. The less risk you present to lending institutions, the more likely they are to say yes to working with you. Another upside here is you’ll pay less in interest over the life of the loan.
Ask Someone to Co-Sign if Absolutely Necessary
If you’re still having trouble getting approved for a loan, getting a co-signer can strengthen your application. Just remember that you’re basically borrowing the co-signer’s credit — so it’s really, really important you pay back the loan on time and in full.
A little legwork ahead of applying for a loan can help you maximize your chances of getting approved.