Before approving you for a loan, lenders want to be sure that you will pay them on time every month. Here are some steps you can take to convince them to approve you for a loan:
Improve your credit score
The main way that lenders determine how well you manage credit is through your credit score and credit history. If you have a strong credit score, you are more likely to be approved for a loan, as it shows potential lenders that you can manage your debt. It will 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 timely payments with a secured credit card. A secured credit card requires you to offer a cash deposit as collateral when the account is first opened. Making payments on time with 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 errors on the credit report. Get a copy of your credit report from each of the three major credit bureaus and review them for errors. Make note of any inaccuracies and report them to the credit bureaus and companies that issued the report.
- Consolidate multiple debts into one. In some cases, it might make sense to consolidate multiple debts into a single loan, preferably with a lower interest rate. Also, debt consolidation can help make your payments more manageable.
Have a stable source of income
Lenders want to make sure that 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 may request some of the following documents as a way to prove your income:
- Last pay stubs
- Multiple years of W-2
- Previous bank statements
- A few years of 1099s
- Tax returns going back a few years
Secondary sources of income, such as royalties, alimony payments, and real estate, can provide further evidence to lenders that you are financially capable of obtaining a bank loan.
Apply for the right type of loan
The type of loan you apply for can determine whether or not you are approved. All loans have specific uses and benefits. The purposes of some loans are clearer than others.
For example, car loans are for buying a vehicle, while personal loans tend to have more flexibility. Also, you may not be eligible for all types of loans.
Find out what you plan to use the money for to help you find the type of loan you need. Common loan types include:
Choose the right lender for you
Choosing the right lender for your needs and your financial situation will play a major role in determining whether or not you are 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’ll need a good to excellent credit score and proof of income to qualify for a bank loan.
- Credit unions: Being a member of a credit union may qualify you for a discounted interest rate. In some cases, you may be able to get a credit union loan 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: Loans from friends, family, or individual investors are considered private loans. This can make the approval process easier, but keep in mind that mixing money and relationships can sometimes cause problems.
Try to get pre-qualified
One of the best ways to verify your eligibility for a loan is to prequalify with the lender. Prequalifying for a loan means that the lender uses some basic information to see if you meet their requirements before completing a loan application.
Pre-qualification usually takes a few minutes to complete. The preliminary application will generally ask for basic personal and financial information. While being pre-qualified doesn’t mean you’ve been approved for a loan, it can be a relatively easy and helpful way to find out what you qualify for and your options.
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