Most of us understand what it takes to get approved for a personal loan: a good credit score, a steady source of income, and a solid credit utilization ratio. However, if you feel like you’re missing one or more of these puzzle pieces, securing a loan can be a struggle.
So, when you receive a letter or email that you’ve been preapproved for a personal loan, it can feel like a dream come true! But, before you move forward, it’s important to understand exactly what being preapproved means.
What does it mean to be preapproved for a personal loan?
Put simply; preapproval is one of several stages of the loan approval process. If you’ve been preapproved for a loan, it means that a lender has used a soft credit pull to access a portion of your financial history, assessed it, and determined that you would be a good candidate for a full approval.
Preapprovals allow the creditor to determine what kind of loan you’d likely qualify for in advance, including the amount, the interest rate, and the terms of the loan agreement. However, it’s important to understand there are a few more steps between being preapproved and receiving your loan! First, you’ll still need to proceed with the application process, which includes a hard credit pull of your credit report.
This hard pull may show the lender additional information that was not considered at the preapproval stage, which could cause your application to be denied. For example, say when the lender prescreened your credit profile, the balance of your credit cards was low. However, you needed to use your credit cards to cover a large emergency expense that you couldn’t quickly pay back in full. In that case, carrying those additional balances could significantly impact your utilization rate and disqualify you for the loan.
What are approvals for personal loans?
When you’ve been approved for a personal loan, it means that your lender has deemed you a worthy candidate for the credit you applied for! Meaning they are confident that you are a responsible credit holder and will pay back the funds borrowed based on your credit history and profile. At this stage, you’re committing to taking on the loan–and the responsibilities that come with it.
How do I boost my preapproval and approval odds?
Consider adding a joint applicant or cosigner
In a perfect world, you’d meet every applicant requirement and be able to get any personal loan you desire! But if you’re practicing healthy financial habits in this reality and still can’t secure a loan, you may want to consider adding a joint applicant or a cosigner to your application.
In this scenario, a trusted individual applies for the loan with you, making them equally responsible for repayment. Especially if you’re applying for a larger loan, a joint applicant or a cosigner can boost your approval odds significantly, as they add an additional assurance that the loan will be paid off in one way or another.
Increase your credit score
The strength of your credit score heavily impacts both your personal loan preapproval and approval odds. Generally, increasing your score increases your chances to be both preapproved and later approved by a lender. To improve your score or keep your score high, you’ll want to:
- Double-check your credit reports for mistakes. Common mistakes that may negatively impact your scores include closed accounts reported as open, misreported credit limits, and the reporting of accounts that don’t belong to you.
- Keep up on your payments. Make sure you’re up-to-date on all monthly payments toward all your debts and contribute more than the minimums whenever you can. Not only will this reflect positively on your payment history, it will also improve what’s known as your credit utilization ratio, which is the percentage of available credit that you’re currently using. Combined, these two factors account for 65% of your FICO score, so it’s essential to stay on top of them.
- Ask for an increase to your credit limit on your credit cards. If your income has increased since you’ve gotten a particular credit card, and if you have a strong history of on-time payments, then it might be a good idea to ask your creditor for a limit increase! As long as you don’t use it, this will lower your credit utilization ratio, which increases your credit score.
Have a steady source of income
One of the biggest factors lenders take into account when preapproving or approving you for a personal loan is your debt-to-income ratio. This ratio compares how much debt you have to how much money you bring in. Typically, the lower your debt-to-income ratio, the better you look to lenders, so having one or more steady sources of income is a major positive.
If, for one reason or another, you find yourself unable to work, you’ll need to show lenders that you have a consistent source of income from something like Social Security, retirement savings, or government benefits.
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