If you want to borrow money and pay it back on a set schedule over a few years, a personal loan could be an option for you. Personal loan interest rates are typically lower than credit card rates and you benefit from having a predictable payoff schedule and knowing exactly when you’ll be debt-free.
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You need to be approved for a personal loan, though, before you’ll be allowed to borrow. These five tips can help you maximize the chances of getting a loan — and at an affordable rate.
1. Check your credit report before applying
Your credit score directly impacts the likelihood that you’ll be approved for a personal loan. It also has a big impact on the rate you’ll pay. Since credit matters so much, you don’t want your credit report to have any mistakes on it. Unfortunately, as many as 1 in 5 reports contain errors.
To maximize your chances of loan approval, check your credit history before applying. You can do this for free at AnnualCreditReport.com. If you find a mistake, you can get it fixed by contacting the credit reporting agencies.
2. Choose the right lender
Different personal loan lenders cater to different customers. For example, some lenders offer loans only to people with good or excellent credit. Others look beyond your credit history and consider other factors like employment.
If you have solid financial credentials, you’ll usually get the best rate by applying with a lender that caters to clients with good credit. But if you don’t, you’re better off not wasting your time applying with a lender that has strict qualifying requirements.
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3. Have proof of income ready
You’ll probably need to show your lender that you earn enough money to repay the loan. This may mean providing documentation like pay stubs or tax returns. You should get these documents ready before you start applying for a personal loan, so you can be prepared to provide them to make the application process go more smoothly.
4. Aim to pay down other debt before borrowing
Lenders consider your debt-to-income ratio. This means they look at how much debt you already have, how much debt you will have after you get the new loan, and how much income you have. If you have too much debt relative to the amount you make, you can’t borrow.
If you can pay down some of what you already owe before getting a personal loan, your debt-to-income ratio will be lower and your chances of approval higher. Debt paydown also helps your credit score too, so making an effort to reduce your balances will be helpful in two different ways in getting the best personal loan rates.
5. Consider a cosigner
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Finally, many personal loan lenders allow you to apply with a cosigner. That’s someone who agrees to pay back your loan if you don’t.
If you have a loved one who has more income than you or better credit and they are willing to cosign, this can help you be able to borrow from more lenders and get better rates. Your cosigner does take on a lot of risk, though, so be sure you pay on time to avoid hurting their credit.
By following these five tips, ideally you can get a great loan that allows you to move forward with accomplishing your financial goals.
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