When life hits hard and you find yourself in somewhat of a financial pinch, you start considering all of your options. For most of us, that means looking into getting a personal loan for the emergency. However, getting a personal loan can prove either easy or difficult, depending on many factors.
At the end of the day, you’ll find that it all comes down to the lender and whether or not they approve your appeal. You’ll also find out that different lenders have different eligibility standards, which can be a good thing for you as it increases your options. But when it comes to the factors that most lenders would evaluate your eligibility upon, you should be well-prepared to present yourself the best profile possible.
Here are five questions you should ask yourself before appealing to lenders for a personal loan.
1. What’s your credit score?
When it comes to personal loans, most lenders are going to evaluate you based on your credit score, which includes many rating factors. To start with, your credit score gives them an overview of how risky a borrower you might prove to be for them. If your chances of defaulting on the loan are high, then some lenders will be reluctant to approve your appeal, while most of them will disapprove.
Most lenders in the U.S. will evaluate your risk percentage using a standard credit scoring model known as FICO. This model takes 5 factors into consideration:
- Credit Utilization Ratio, which accounts for 30% of your score
- Repayment History, accounting for 35% of your score
- Credit History Length, accounting for 15%
- Credit Mix, accounting for 10%
- New Credit, which accounts for the final 10% of your score.
While evaluating your credit score is one of the popular methods used by many lenders, it’s not the only definitive way of getting your personal loan approved. There are still some lenders who’d be willing to provide personal loans for those with bad credit to help them out of an emergency. While these loans might be a little bit slower to process, and some of them come with higher interest rates, they can be your best option if you’re looking for a way to get loans or financial help in spite of your bad credit. It can also help rebuild your credit if you pay these loans in a timely manner.
2. How old are you?
While your age shouldn’t directly affect your eligibility, it plays an important factor in deciding your eligibility. It makes sense, to be honest, if you’re still underage, then the chances of you lacking an occupation and a source of income are quite high. It may also mean that the borrower may not be as responsible or mature as an adult, which makes the risk of defaulting on the loan higher. Age can also affect other deciding factors, such as repayment history or proof of regular and stable income.
Many countries and states put their own age limits on personal loans. Some countries place their limit to over 16 years of age, while others place it after 17, 18, 19, and sometimes even 21 years of age. However, you’d still be able to get a personal loan if you provide enough evidence of your ability to pay back on time. Getting a cosigned application from the other eligible adult can improve your chances significantly.
3. Do you have a stable source of income?
Any lender will ask you to provide some proof of your ability to pay back on time. Usually, their proof of choice is to provide documents on a regular and stable income, often over a period of time of their choosing. Some would ask for a record of your last three months, others for the past year.
This factor can prove to be a bit problematic for self-employed and freelancing individuals. Many lenders would be hard-pressed to give out credit score, and you might have some difficulty finding loans of appealing rates and conditions in your case.
The good news is that you can still qualify for a personal loan if you provide proof of your repayment ability. In this case, you may be asked to provide a document of your income over the duration of the last 12 months. If you’re applying for a personal loan as an individual, the minimum annual income requirements will be quite feasible, usually less than $20,000. It all comes down to your income-to-debt ratio.
4. Can you provide any assets as collateral?
If worse comes to worst, lenders will want to be reassured that they won’t end up with any sort of loss following a personal loan. That’s why some of them are going to evaluate your assets, including both liquid and non-liquid ones. Having a secure flow of liquid reserve works as a reassurance that your probability of defaulting on a personal loan is low, which encourages lenders to consider your application. On the other hand, restricted assets with no accessible cash flow may alert some of the lenders. On the positive side, unsecured loans are much more common compared to secured ones.
5. Where do you live?
Depending on your place of residence, you might face more or less eligibility criteria for a personal loan. For instance, some countries require you to provide proof of citizenship before applying for a personal loan. You’ll also find that most online lenders place their specific criteria when it comes to citizenship and place of residence. This factor will mostly affect individuals living in a foreign country, with students being on the top list of those prospective borrowers. However, it’s good to know that many lenders place fewer restrictions when it comes to student loans, offering a more flexible acceptance of different types of visas.
Opting for a personal loan can save your day in the worst situations. However, sometimes you might get hit with the bad news of being ineligible for the loan. Your eligibility depends on many factors, and it certainly varies from one lender to another. All you can do is try to increase your chances of approval, and you can do that through maintaining a good credit score, providing proof of being financially capable of repaying your debt, and, in some cases, providing some of your assets as collateral.