A personal loan provides a flexible means of funding various types of expenses. These loans can range from a low amount of $600 to the six digits. Borrowers may use personal loans to subsidize medical bills, car repairs, wedding expenses, funeral costs, and home renovations. They may also use the money for other purposes, such as debt consolidation.
The criteria for loan approval can vary for each lender. However, there are strategic ways to maximize your chances of getting approved.
In this article, I will discuss the most effective tips to boost a typical personal loan applicant's shot at approval. These tips include working on your debt-to-income (DTI) ratio, increasing income, finding ways to prequalify before formally applying, and improving your credit score.
In addition, to help borrowers who might not be eligible for a conventional loan, I will differentiate traditional loans from VA direct and VA-backed veterans home loans.
While such loans still require income and credit for the loan amount you wish to borrow, they may offer better terms than regular personal loans from a credit union, private bank, or mortgage down payment. I will explain the advantages of getting a VA loan, which includes the omission of a down payment requirement 90% of the time.
Through this article, readers will become aware of their options to get the best possible shot at the loan they need to accomplish their life goals.
By the Numbers
As of the third quarter of 2023, Americans collectively held $241 billion in personal loan debt, reflecting a 3.9% increase from the previous quarter's $232 billion and a notable 14.8% surge from the same period a year ago.
This indicates a significant upward trajectory in personal loan obligations. The number of Americans with personal loans has also risen, reaching 23.2 million in the third quarter of 2023, compared to 22.0 million in the preceding year. This marks a 5.5% year-over-year growth, underscoring the increasing prevalence of personal loans among the populace.
Personal loan debt also makes up 5.0% of non-housing consumer debt, constituting 1.4% of the overall consumer debt landscape in the third quarter of 2023.
In contrast, credit card debt among Americans stands at a substantial $1.079 trillion, forming 6.2% of the total outstanding debt. These figures highlight the varied composition of consumer debt and the distinct role personal loans play within it.
The delinquency rate for personal loans, defined as payments being 60 days or more overdue, currently stands at 3.75% as of the third quarter of 2023. This marks a decline from the previous year's rate of 3.89%, indicating a positive trend in loan repayment behavior among borrowers.
The average personal loan debt per borrower has reached $11,692 in the third quarter of 2023, showcasing an increase from the average of $10,749 observed a year earlier. This uptick in individual debt highlights the evolving financial landscape and the growing reliance on personal loans to address financial needs.
Notably, most borrowers (52.9%) opt for personal loans to consolidate debt or refinish credit cards. Home improvements are the second most common reason, accounting for 7.5% of personal loan purposes. This insight sheds light on the diverse motivations behind individuals seeking personal loans and the financial challenges they aim to address through this financial instrument.
Approval Boosters: Understanding What's Required
Personal loans are a type of unsecured debt that borrowers may use for various purposes, such as consolidating high-interest credit cards, paying for medical expenses, car repairs, wedding expenses, funeral costs, or funding a home improvement project.
Unlike secured loans, personal loans do not require collateral, which means the lender relies on your creditworthiness and income to determine your eligibility and interest rate.
However, getting approved for a personal loan is not always easy, especially if you have a low credit score, a high debt-to-income (DTI) ratio, or a limited income. Lenders use different criteria to evaluate your loan application, such as your credit history, income, employment status, and existing debts. These factors help them assess your ability and willingness to repay the loan on time and in full.
If you do not meet the lender's minimum requirements, however, you may face rejection or unfavorable terms, such as a higher interest rate or a lower loan amount. This can affect your financial goals and credit score, as each hard inquiry from a lender can lower your score by a few points.
Improving your success rate
Fortunately, there are some effective ways to boost your chances of getting approved for a personal loan. Here are some tips to consider before you apply:
To improve your credit score, you can try to pay your bills on time, keep your credit card balances low, dispute any errors on your credit report, and avoid applying for multiple loans or credit cards within a short period.
For example, if you have a credit score of 650 and improve it to 700 by following these tips, you can save hundreds or thousands of dollars in interest over the life of the loan.
These are some ways to improve your chances of getting approved for a personal loan. By working on these factors, you can show the lender that you are a reliable and trustworthy borrower who can repay the loan on time and in full.
Remember to shop around and compare different offers before applying for a personal loan, as this can help you find the best deal for your situation.
When all else fails
While the above four tips work well for most applicants, to assure success with their personal loan applications, they might not work for everyone. For instance, what if your employable skills won't easily qualify you for a higher-paying job? So, does that mean you can't boost your chances for approval?
Well, the good news is that you still have one more strategy that pushes you over the approval hurdle: Apply with a co-applicant!
Applying for a personal loan with a co-applicant can significantly enhance your chances of approval by presenting a stronger financial profile to lenders. When you apply for a loan, whether it's a personal loan, mortgage, or any other type of credit, the lender assesses your creditworthiness and financial stability. Here's how having a co-applicant can be beneficial:
WORDS OF CAUTION: While applying with a co-applicant can improve your chances of loan approval, it's crucial to consider the implications for both parties involved carefully. Clear communication, trust, and a shared understanding of the financial commitment are essential when entering a co-application arrangement.
Traditional Vs. VA-Direct Vs. VA-Backed Home Loans
As indicated earlier in this post, borrowers may use traditional loans for various purposes, including to help finance the purchase of a loan. However, veteran members of the military have recourse to two additional types of loans that they may tap into to finance the purchase of a home. These include VA (Department of Veterans Affairs) Direct and VA-Backed Veterans Home Loans.
Understanding the Differences
Traditional loans and VA loans (including VA Direct and VA-Backed Home Loans) differ in terms of eligibility requirements, the entity providing the loan, and specific benefits associated with each type of loan. Understanding these differences may help with making the right choices, when it comes to applying for a loan.
This knowledge may also help boost your chances of approval when you apply for the right product.
Eligibility
Traditional loans, often offered by banks and mortgage lenders, are available to a wider (compared to VA loans) range of borrowers. Eligibility is typically determined based on creditworthiness, income, and other financial factors. There are no restrictions on the availability of these loans to a particular group of individuals, which are available to the broader public.
VA loans assist eligible veterans, active-duty service members, and certain surviving spouses in obtaining home financing. VA loans are available to those who meet specific service requirements, such as a minimum length of active-duty service.
Entity providing the loan
Private lenders, such as banks and mortgage companies, may offer traditional loans. The government does not insure or guarantee such debt.
The Department of Veterans Affairs guarantees or directly provides VA loans. The government directly funds VA Direct Loans, while private lenders provide VA-backed loans, but the VA guarantees them. The VA guarantee reduces the risk for lenders, allowing them to offer more favorable terms to eligible borrowers.
Down payment and mortgage insurance
Conventional loans may require a substantial down payment, and private mortgage insurance (PMI) is often necessary if the down payment is less than 20%.
VA loans are known for offering competitive terms, including the possibility of zero down payment for eligible borrowers. Additionally, VA loans do not require private mortgage insurance, which can be a significant cost savings for borrowers.
Interest rates
Interest rates for traditional loans are based on the borrower's creditworthiness and other financial factors. Rates may vary between lenders.
VA loans often feature competitive interest rates. The VA's guarantee makes lenders more willing to offer favorable rates to eligible veterans and service members.
Dissecting the differences
As you can see from the summary above, the VA loan program offers many benefits over traditional personal loans that can help you achieve your dream of homeownership. But what do these differences mean, and what financial impact do they have on your home-buying decisions?
Let's unpack some of the financially impacting features to help you understand those distinctions:
Based on the above (hypothetical) example of a $240,000 loan, compared to a traditional loan, a loan through the VA loan program may potentially save (or help defer) borrowing cost by nearly $125,000. That saving may potentially increase by nearly $5,500 more if you receive VA disability compensation.
Parting Thoughts
A personal loan offers a versatile solution for funding diverse expenses. Individuals can utilize personal loans to cover various costs, including home purchases. The approval criteria for loans can differ among lenders, leading to some applicants not meeting the qualifications. Nonetheless, there are strategic approaches to enhance the likelihood of approval.
Moreover, active-duty and retired members of the armed forces, who may not be eligible for a traditional loan, could access VA direct and VA-backed veterans home loans.
While these loans still necessitate sufficient income and a favorable credit history for the desired loan amount, they may present more favorable terms compared to standard personal loans offered by credit unions, private banks, or mortgage down payments.
The tips laid out in this post will boost your odds of loan approval for traditional personal loans, as well as VA direct and VA-backed veterans home loans.
The post Boosting Your Odds of Loan Approval appeared first on Due.
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