How To Qualify For A Personal Loan

How To Qualify For A Personal Loan

Written by Caitlin Wood
Last Updated November 22, 2021

Applying for and then getting approved for a personal loan can often seem like a daunting task. The thought of endless paperwork to fill out and meetings to attend with your lender is almost enough to stop anyone from even trying to get the financing they need. The good news is that it doesn’t have to be like this, the financial world is changing and there are plenty of options out there that can be tailored to your unique financial needs.

The personal loan is no longer an elusive goal that only people with pristine credit scores and perfect credit histories can achieve. Anyone with any credit now has just as many opportunities to qualify for the personal loan they want and need, no matter what type of cost you’re looking to cover:

Secured vs. Unsecured Loans

Before you can qualify for a personal loan you need to determine what type of personal loan you want, can afford and finally can get approved for. Applying for the right type of loan should increase your chances of getting approved. Generally speaking, we can divine personal loans into two categories, secured and unsecured.


A secured personal loan requires you, the borrower, to put up some type of collateral in order to qualify. This type of loan is less risky for the lender and therefore is frequently offered to potential borrowers who have low credit scores or who have experienced past financial issues. There is a wide variety of assets you can put up as collateral, but here are a few of the most common:

  • Cars
  • Recreational vehicles
  • Property

Because your asset acts as collateral, it can be seized by your lender should you default on your loan.


An unsecured personal loan does not require the borrower to put up collateral. Unsecured loans sometimes have higher interest rates as they are riskier for the lender. You will also be required to have a higher credit score.

If you’re determined to qualify for a personal loan we suggest that you’re as honest with yourself as possible. If your credit score is lower than you’d like and you feel as though it will hinder your chances, discuss with your lender the option of a secured loan. We believe it’s a better idea to apply for the loan you’re more likely to get approved for instead of moving forward with something that might end up being a waste of your time.

Interested in the difference between personal, private and payday loans in Canada? Click here.

Guarantor Loans

While guarantor loans aren’t quite the same as typical personal loans, they are a good option for borrowers who have bad credit or who can’t get approved with conventional lenders for any other reason. Essentially, you would need to find a borrower to co-sign your loan with you, ideally someone with good credit and a favourable financial status. Here, your cosigner’s credit will become the main focus, rather than your own. However, you will still be primarily responsible for making your loan installments on time and in full. If you manage to do that, your credit score will rise gradually, even if your credit health isn’t actually an important factor.

Thinking of becoming a loan guarantor? Read this first

Guarantor loans, like any other type of credit product, need to be handled competently to be effective, for two reasons. Firstly, you’ll be racking up penalties and interest, as well as damaging your credit whenever your payments are short, late, or missed entirely. Secondly, if you default for too long, the responsibility of taking over your payments falls to your co-signer. If they too default for a certain number of payments, they’ll also fall victim to penalties, interest hikes, credit damage, and ultimately troublesome debt.

Not sure if a guarantor loan is the right solution for you? Check out this other article. 

Approved vs. Pre-Approved

Getting pre-approved for a loan means that your potential lender is willing to lend you a certain amount at a specific interest rate based on factors like your income, or your credit score and credit history. Technically there are two types of pre-approval: lenders can simply offer you pre-approval via a letter offer or you can ask for it.

So, how will a pre-approval help you get qualified for the personal loan you want? Pre-approval is a tool you can use to help speed up the loan process. While it won’t actually increase your chances of getting approved, it will allow you to move on to another lender and not waste too much of your time waiting around to get approved or rejected.

Have you recently been rejected for the loan you needed? Read this article to find out why.

Increase Your Approval Rate For A Personal Loan

Before applying with a lender, there are a few things you should do to increase your chances of being approved for a personal loan.

  • Check your credit score – Most lenders will determine your eligibility for a loan based on your credit score alone. So, if you have a low score, it might be worth waiting a few months to improve your score before applying for a personal loan.
  • Pay down your debt – Most lenders will look at your debt-to-income ratio to determine if you’re capable of paying an additional loan. If the additional loan increases your debt by too much, your lender may think you are too much of a risk. As such, paying off a bunch of smaller debts or one big debt can help your chances of being approved.
  • Adding Security – As previously mentioned, guarantor and secured loans provide lenders with security. This security makes you a less risky borrower, which can help you qualify for a personal loan with better terms.
  • Apply based on your qualifications –  Oftentimes, lenders will have a credit score, income, and debt-to-income ratio requirements. Be sure to ask your potential lender about these requirements prior to applying. This will save you from potential rejections and unnecessary hard inquiries.

What Documents Do I Need To Apply?

Personal Loan Application Checklist

Choose The Best Lender for Your Credit Situation

Another way you can increase your chances of qualifying for a personal loan is to choose the lender you want to work with according to your credit score. If you have a low credit score, around 650 or less, then most if not all banks and other traditional financial institutions are likely to reject your application. And if you’re not rejected then you’ll definitely be offered a significantly higher interest rate.

You should instead opt to work with an alternative lender like Mogo who specializes in helping out credit-constrained individuals. Just make sure you avoid payday lenders and other predatory lenders who are looking to prey upon the desperate.

Consider An Online Lender

Alternative online lenders are typically more willing to work with you, and their qualification criteria are more creative. They rely less on credit scores and can offer you individualized service. The application process is usually streamlined and can be completed from the comfort of your own home: no need to visit the office of your lender time and time again.

Your Debt-to-Income Ratio Is Important

When applying for a personal loan you need to consider your debt-to-income ratio. This ratio measures how much of your gross income (before tax income) you spend on debt repayment. In Canada, a debt-to-income ratio that is 36% is considered healthy, any higher than that could hinder your ability to get approved for the personal loan you want.

If a large percentage of your income is already devoted to debt repayment you may have some difficulty getting approved and should consider paying down some of your other debts before applying for a new personal loan.

What About Bankruptcy?

Bankruptcy is another factor that can affect your chances of getting approved. If you are currently going through the bankruptcy process it is extremely unlikely that you will find a lender willing to approve you. Keep in mind that if you do find a lender willing to give you a new loan while you’re going through bankruptcy, make sure you are 100% certain that it is not a scam.

The good news is that once your bankruptcy has been discharged your chances of getting approved will increase. You’ll have to work a little harder to prove your creditworthiness and may have to accept a higher interest rate but you should still be able to get the personal loan you need.

Learn more about filing for bankruptcy in Canada, here.

Do Banks Offer Personal Loans?

Banks do offer personal loans, but again their requirements are usually more severe and can often make getting approved more difficult. It completely depends on your financial situation but you may want to consider working with an online lender who specializes in personal loans instead.

Securing A Personal Loan

In order to secure the personal loan you want, you need to make sure you have all the appropriate information and documentation, as requested by your lender. Our number one piece of advice for those looking to qualify for a personal loan is to make sure you do everything possible to make your lender’s job easy, this means:

  • Filling out your application properly and in full
  • Being as quick as possible to provide any requested documents
  • Being open and honest about your income and any other debts you may have
  • Following up with any additional information needed

Applying for a personal loan doesn’t need to be a horrible experience if you’re prepared and know what to expect you should be able to find the financing you want from a great lender who understands your needs.

Rating of 4/5 based on 15 votes.

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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