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.
While specific personal loan requirements vary by lender, certain criteria are almost always evaluated when lenders review loan applications. Get familiar with the following common loan criteria before you apply for a personal loan:
Your credit score is among the most important factors lenders look at when reviewing your loan application. In Canada, credit scores range from 300 to 900. The closer you are to 900, the higher your chances of loan approval.
Generally speaking, lenders require a minimum score of 660, depending on other factors, such as income and collateral. To take advantage of the lowest interest rates and most favourable loan terms, a score of at least 720 is best.
That said, some lenders may allow credit scores much lower than this, though the interest rates charged on bad credit loans are much higher.
Your income level is another crucial component of your loan application. Lenders will require specific minimums when it comes to income to make sure you earn enough to cover your personal loan payments, as well as all other debts you carry. The exact income level needed will depend on many things, like the loan amount you’re applying for, and your assets and debts.
While income requirements may vary quite a bit among lenders, the key is to have a steady job and a reliable income. Find out how much you need to earn to get approved for a personal loan with the lender before applying.
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.
A secured personal loan will require a valuable asset to be used to back the loan. Collateralizing your loan will reduce the lender’s risk. If you ever default on the loan at some point, the lender can repossess the collateral and sell it to recoup the funds you failed to repay.
You can use assets such as your home, car, investments, and any other item that has a lot of value.
Your lender will want to see proof that you are who you say you are and that your financial and credit health is strong enough to carry the loan. To verify your identity and your financial profile, the lender will ask to see various documents, as listed below:
Even if you specified how much you earn in your loan application, the lender will still want to see tangible evidence of such earnings.
In order to maximize your chances of approval at an affordable rate, check out these tips to increase the odds of qualifying for a personal loan:
Before you apply for a loan, be sure to pull your credit report to see what your credit score is. Your score will influence your ability to qualify for a personal loan, so make sure it’s high enough to meet the lender’s criteria.
It’s also important to assess how much you need to borrow. The more you borrow, the more you’ll have to pay back, plus interest. Make sure you’ve carefully assessed exactly how much you need to borrow so you apply only for what’s required.
Before you officially apply for a personal loan, consider getting pre-approved first. This will help you find out if your finances and credit health meets the lender’s requirements. Moreover, getting pre-approved will give you a clear idea of what type of loan you can get and will help you avoid unnecessary application rejection and hard credit inquiries.
To get pre-approved, you’ll need to provide lenders with information about your income, employment, and assets. Based on this information, you’ll receive offers on different loans, which you can then compare side by side to see where the best options are. Using an online comparison tool will make comparing loan options quick, easy, and convenient.
Once you’re ready to proceed with an official loan application, you’ll need to provide the lender with specific documents that they’ll use to verify your identity and financial health, as listed above.
Keep in mind that any inaccuracies on your loan application and missed documents will prolong the approval process and may even risk loan rejection.
If you apply for a personal loan with an alternative online lender, you could receive an answer about whether or not you’re approved within minutes to a couple of days depending on the lender.
Shortly after receiving the approval notice, you’ll receive your funds. The lender will send you the funds via e-transfer or by depositing the money electronically into your bank account.
Before applying with a lender, there are a few things you can do to increase your chances of qualifying for a personal loan.
Most lenders will use your credit score to determine your eligibility for a personal loan. Credit scores are of particular importance to banks and other traditional financial institutions. While there are personal loan lenders who will approve you for a personal loan with bad credit, you’ll have an even better chance of qualifying with a high credit score. Moreover, the higher your credit score, the more likely you’ll be able to secure better loan rates and terms.
Alternative online lenders have less stringent lending criteria. They rely less on credit scores and put more emphasis on other factors such as your income, employment stability and DTI ratio. You’ll have greater chances of qualifying for a personal loan with an alternative lender than you would with a bank.
As previously mentioned, 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 other debts prior to applying can help your chances of qualifying for a personal loan.
Lenders look at a variety of factors to determine your risk as a borrower. As such, by offering collateral or a cosigner to sign the loan, you’ll be reducing the lender’s risk. This security makes you a less risky borrower, which can help you qualify for a personal loan with better terms.
Generally, lenders will have requirements in relation to the borrower’s credit scores, income, and debt-to-income ratio. Be sure to ask your potential lender about these requirements prior to applying. This will save you from potential rejections and unnecessary hard inquiries
While a pre-approval doesn’t guarantee approval, it does signify that you have a high chance of approval for a personal loan with that lender. 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.
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.
Applying for the right type of loan should increase your chances of getting approved. Here are two types of personal loans you can qualify for more easily than an unsecured personal loan.
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:
Because your asset acts as collateral, it can be seized by your lender should you default on your loan.
If neither an unsecured nor a secured personal loan is the right option for you, you can consider a guarantor loan.
Guarantor loans are a good option for borrowers who have bad credit or who can’t get approved by conventional lenders. Essentially, you would need to find a borrower to cosign 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. Ultimately, the goal is to use a guarantor loan to help improve your credit so you can get approved on your own in the future.
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, less than 600, you’ll likely have trouble getting approved by banks and other traditional financial institutions. 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.
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:
Applying for a personal loan doesn’t need to be a difficult experience if you’re prepared and know what to expect.
Rating of 4/5 based on 15 votes.
Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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