Before approving you for a loan, lenders want to feel confident you’ll pay them back on time every month. Here are some steps you can take to convince them that they should approve you for a loan:
Improve your credit score
The primary way lenders determine how well you manage credit is through your credit score and credit history. If you have a strong credit score, you’re more likely to get approved for a loan as it shows potential lenders that you can manage your debt. It’ll also help you get the best interest rates, terms, and credit limits. One way to increase your chances of getting approved for a loan is to improve your credit score:
- Make on-time payments on a secured credit card. A secured credit card requires you to offer a cash deposit as collateral when the account is first opened. Making on-time payments on this type of card will help improve your credit and add a more positive credit history to your report.
- Use automatic payments to stay on top of your obligations. Setting up automatic payments or online bill pay can help you pay your bills on time.
- Dispute credit report errors. Get a copy of your credit report with each of the three main credit bureaus and review them for errors. Take note of any inaccuracies and report them to the credit bureaus and companies that issued the report.
- Consolidate multiple debts into a single one. In some cases, it could make sense to consolidate multiple debts into a single loan, preferably with a lower interest rate. Plus, consolidating debt can help make your repayments more manageable.
Have a stable source of income
Lenders want to make sure a borrower can repay a loan. To get approved for a bank loan, be prepared to show evidence that you have a stable source of income.
Lenders might ask for some of the following documents as a way to prove your income:
- Latest pay stubs
- Multiple years of W-2s
- Previous bank account statements
- A few years’ worth of 1099s
- Tax returns going back a few years
Secondary sources of income, like royalties, alimony payments, and real estate property, can provide further evidence to lenders that you’re financially capable of getting a bank loan.
Apply for the right loan type
The type of loan you apply for can determine if you get approved or not. All loans have specific uses and benefits. The purposes of some loans are more clear-cut than others.
For example, car loans are for purchasing a vehicle, while personal loans often have more flexibility. In addition, you may not be eligible for all loan types.
Figure out what you plan to use the money for to help guide you to the type of loan you need. Common loan types include:
Choose the lender that’s right for you
Choosing the right lender for your needs and financial situation will play a pivotal role in determining whether or not you get approved. While most traditional lenders are banks, they may not always be affordable or accessible. Comparing different financial institutions can help you find an affordable loan.
The following is a list of the most common lender options:
- Banks: Banks may offer more competitive interest rates than other lenders, but you will need a good to excellent credit score and proof of income to qualify for a bank loan.
- Credit unions: Being a credit union member may make you eligible for a discounted interest rate. In some cases, you might be able to get a loan from a credit union even with a low credit score.
- Online lenders: Interest rates through online lenders will vary, but the application process tends to be faster.
- Private lenders: Borrowing from friends, family members, or individual investors is considered private lending. This can make for an easier approval process, but be aware that mixing money and relationships can sometimes cause problems.
Try getting pre-qualified
One of the best ways to check your eligibility for a loan is to pre-qualify with the lender. Pre-qualifying for a loan means the lender uses some basic information to see if you meet their requirements before filling out a loan application.
Pre-qualification usually takes a few minutes to complete. The preliminary application will typically ask for basic personal and financial information. While getting pre-qualified doesn’t mean you’re approved for a loan, it can be a relatively easy and helpful way to know what you qualify for and your options.