If you’re struggling under a mountain of debt, you may have already convinced yourself that you could never qualify for a personal loan. Well, think again. Although credit scores, income and debt-to-income ratios are certainly considered when candidates apply for personal loans, it may be easier than you think to receive a loan that could help improve your financial situation by shrinking that mountain. Here’s a look at what lenders are looking for when making personal loan decisions.
What Lenders Look For
Not surprisingly, the first thing that lenders look at when deciding whether to offer someone a personal loan is their credit history. This is the detailed report that shows how you have managed credit and payments over the years. Associated with the credit history is your credit score, which is usually between 300 and 850; the higher the score, the lower the risk for lenders. But even if you have a lower number, that doesn’t mean a loan is impossible.
Lenders also consider your ability to make payments — namely, your income and employment history. They look at your current debts and create what is known as a debt-to-income ratio. If your personal loan is secured with collateral, the lenders evaluate the value and equity of the collateral. Often, this is your car or home. They may want to know about any savings or assets you have beyond your collateral that could help repay the loan. Finally, they want to know how you plan to spend the loan proceeds.
Credit Scores Impact Terms
Because a personal loan is an installment loan, the debt is less damaging to your credit score than credit card debt. In fact, because a personal loan offers diversity in your credit, it can even improve your credit history. Of course, if you already have years of damage to your credit score, lenders have to consider the future risk.
Overall, when the risk is higher, the terms are less favorable to the consumer. You may have to pay the loan off over fewer years, or perhaps the interest rate would not be as low for someone with worse credit. While the terms are impacted, it is still possible to receive a personal loan as a way to begin rebuilding your credit and find debt relief.
Small Loans Are Still Possible
If you have trouble getting a personal loan by yourself due to a poor credit history, don’t give up hope. There are many options still available. First, you could enlist the help of a co-signer to act as a personal loan co-applicant. If they have a positive credit history, it could boost your chances. Another option is to apply for a smaller personal loan. This presents the lender with less risk and also gives you the opportunity to pay down some of your high-interest credit card debt. If you have collateral, that can also help you get a secured loan. The point is, there are many options that are worth considering as you create a debt management plan for yourself. Personal loans are just one tool you can use to achieve fiscal health.
Ready to learn more about whether you could qualify for a personal loan? Click on Refi.com’s personal loan page to begin the process today.