No matter how careful you are with your money, chances are there are times when you could use some extra funds. Medical bills, unexpected household expenses, and emergency situations are just a few of the reasons why someone might need more money.
Credit cards are typically the first things people turn to during these times. But while credit cards are convenient, and almost everyone has one readily available, a personal loan might be a better choice. Unlike credit cards, a personal loan has a fixed rate and a debt repayment plan so that you know exactly when your loan will be paid off. Unless you pay off your entire credit card balance at once, you will have an expensive revolving debt that could take years to pay down.
Personal loans are issued by banks, credit unions, and private lenders and they aren’t given to everyone; you have to apply and meet certain qualifications in order to receive one. After all, lenders want to be confident that the loan will be paid back. So what can you do to qualify? While there is no guarantee you will qualify for a loan, here are some tips that can help boost your chances:
4 Tips to Help You Qualify for a Personal Loan
- Know Your Credit Score – Your credit score is key to qualifying for a personal loan. It is a numerical score based on the types of credit you use, your current debt, on-time payment history, and other information. It helps lenders determine the level of risk associated with giving you a loan. Banks and credit unions typically look for credit scores above 700. The higher your credit score, the higher loan amount you’ll qualify for and the lower the interest rate. While a lower score may not disqualify you completely, lenders may offer you a smaller loan amount with a higher interest rate.Prior to applying for a personal loan it is a good idea to know your credit score. There are several reputable online services such as Experian.com and creditkarma.com that allow you to view your scores and reports. If your credit score is not that strong, there are certain steps you can take to improve your score.
- Look at Your Debt to Income Ratio – Lenders also look at your ratio of debt to income (DTI). This number is a percentage and is your total minimum monthly debt divided by your gross monthly income. Lenders prefer a DTI less than 36% . Here’s a calculator from Bankrate that can give you an estimate of your debt to income ratio.
- Keep in Mind Your Job Stability – Lenders like to see a consistent employment history. If you have been in your current job for at least two years, you should be in good shape. Employment gaps and frequent job hopping can be red flags to some lenders, but not always. If you’ve changed jobs within the last few years, but have stayed in the same line of work or advanced your career, you should be ok. Also, employment gaps that are due to reasons such as military deployment, full-time school, or maternity leave will most likely not have a negative influence on your loan application.
- Don’t Apply For More Than What You Need – Avoid applying for more than you need or can reasonably afford. While it can be tempting to apply for a lot more money, there is a chance you will get rejected and that can negatively affect your credit score – which will impact your future borrowing power.