A personal loan is an excellent way to work towards your financial goals. It allows us to make larger purchases and achieve milestones in life a lot quicker than we would have imagined. But when it comes to gaining loan approval, it can be a lot more difficult than we expected. Especially if you’re currently facing a lower credit score. So, what credit score do you need for a personal loan? And how do you improve your credit score to apply for a loan product successfully? Don’t worry, we’ll tell you below.
What is a personal loan and how to choose the right one for you?
A personal loan is a type of credit that helps you make any large purchase. For example, home renovations, funeral expenses, medical bills, debt consolidation or even an unexpected family emergency. A personal loan allows you to pay off equal amounts over a few months to a few years. This is referred to as an installment loan. In addition, your equal payments will include interest rates and fees on top of your total amount borrowed.
When choosing a personal loan, it’s important to consider a few different factors. For example, try to consider the affordability of the loan. For example, check your total income, expenses, and current debt amount. By doing this, you will ensure you have the bandwidth to take on more debt. Remember, a personal loan is personal to you. Even if your friend or family member can afford to manage multiple loans, consider what you can afford first. By prioritizing your own financial situation, you are ensuring you are keeping your credit in good standing.
Lastly, figure out exactly why you need a loan and for how long you want to borrow. You can then shop around, check out your options and assess the affordability of the loan considering factors such as the interest rates, APR and other fees. Depending on your credit score and other factors, your extra loan costs may vary.
What factors do lenders consider for personal loan approval?
Now that you’ve figured on why you need a loan, what you can afford and how long you want to borrow for, it’s time to consider your chances of loan approval. There are number of requirements you must meet to qualify for a loan. Mostly, your lender will look at your credit score and credit history. Check out more detail below:
- Credit score – Lenders will either use standard credit scoring models from either Equifax or TransUnion to calculate your credit score.
- Credit history – Lenders will consider your credit history and the length of time you have had credit. They will also look at how much credit you currently have and if you’ve paid back credit diligently in the past.
- Debt-to-income ratio – It’s important to lenders to know that you can afford to pay back your financial obligations on top of your loan payments.
- Current cash flow – Sometimes, lenders may look at your bank account transactions to see how much money you have left after your other expenses. This is called free cash flow and often, the more of it you have, the better in the eyes of your potential lender.
What credit score do you need for personal loan approval?
It’s common to not feel confident when speaking about your credit score. For example, only 62% of Canadians agreed they were confident speaking about their score. Credit scores range from 300 to 900 and the average score in Canada is 650 to 750. If you have a good or excellent credit score (with numbers 700 or higher) it means that your loan application will be approved faster and with the best terms possible. On the other hand, if your credit score falls below 600, getting a loan can be difficult even impossible and could come at much higher interest rates than usual. This kind of situation can improve by building up a positive credit history including making regular payments for any loans you may already have such as personal loans for example.
Getting pre-approved for a personal loan includes the use of your credit score as a tool to predict if you can make monthly payments. Since Canada has no national credit scoring system, each financial institution establishes its own criteria regarding credit scores needed by borrowers to qualify for different types of loans even from the same bank.
How to improve your credit score for loan approval?
It is also possible to improve your credit rating by taking steps such as paying off outstanding loans, improve your credit history by making regular payments and being careful about the number of inquiries made to your history.
When applying for a loan, it is a good idea to start looking for a lender that offers low-interest rates and favourable terms. Try to improve your credit score as much as you can prior to applying for a new loan because otherwise some lenders may decline or cancel your application altogether. In addition, check you some simple steps to improve your credit score for loan approval:
- Obtain a secured credit card. You can easily improve your credit score by applying for a secured credit card. This type of credit card is backed by a cash deposit and reports your payments to both credit bureaus.
- Keep your credit utilization below 30%. In short, try not to spent more than 30% of your total credit limit. If you use more, this may indicate to lenders that you’re at risk of defaulting on future loan payments.
- Always make your credit card payments on time. Simply put – always pay at least on or before your payment due date. Late payments may incur extra fees and damage your score.
- Try not to apply for too many financial products. When you apply for a loan, a hard credit inquiry will be pulled. Regardless of whether you are approved or denied a product, each time it will damage your score.
- Utilize financial technology. Don’t be afraid to utilize companies (like Marble) to help you reach your credit score goals faster. It’s what we do best. You can join the MyMarble Premium program today to help you increase your credit score using our personalized recommendations. Then, begin your journey to your dream credit score to help you achieve a personal loan.