Getting loan approval on any type of loan these days is more difficult than it has been in the past. It is critical that a potential borrower provides a complete picture of their financial status and background so that the lender can make an unbiased, thorough review of their financial situation. In order for a borrower to have the best chance of securing a loan with the most favorable terms, there are several essential tasks every borrower should complete in advance of applying for a loan.
Determine what you want and need in a loan
There are as many types of loans are there are types of borrowers. From mortgages, auto loans, credit cards, and personal loans, you need to understand and make a decision on what type of loan is best for you when you begin your search for a loan. There are also secured loans; these work best for borrowers with less than perfect credit. By putting your home or vehicle up as collateral, you can qualify for better rates on a mortgage, car loan, or home equity loan. It’s best to know if you are willing to stake an asset on your loan, or not, before you apply. Offering sufficient collateral shows a lender that you are a responsible borrower, one who will do everything possible to repay your loan on time.
Decide where to borrow or not borrow
It is always smart to shop around, especially for financial services like loans. Depending on the type of loan you need, you can start by looking at local companies that have a reputation for providing affordable loans of type you are seeking. Check in with several institutions, and thoroughly compare their costs and interest rates. You should have a budget in place for terms you know you can afford before you speak to lenders. It is also important to have an idea about your “over-budget” range, which is a range of interest rates and monthly payments that you could make work in a pinch.
Build your credit score
If nothing else, you should know your credit history and current credit score before you speak to any lender. This can be done easily by checking your FICO score or by obtaining a full credit report any of the major consumer credit reporting agencies such as Experian, Equifax, or TransUnion. If you have some drama in your credit history, and if you can afford to wait on your loan, it might be a good idea to try to repair your credit first. Pay off old debts if possible. A higher credit score and cleaner credit history presents a better picture to potential creditors.
Establish a stable source of income
A good credit rating and score is important, but a stable, current income is equally important. It may also not be enough to have a current income; a stable history of income is also essential. Your chances of approval for a generous loan with favorable terms increase when you can show you are a responsible, contributing citizen. If you are self-employed, it is important that you can demonstrate multiple years of steady income through your business.
Know your whole story
It is important to pay close attention to your “debt-to-income ratio.” This is a representation of all your monthly debt payments divided by your gross monthly income. This is a figure that lenders use to measure your ability to repay the money you have borrowed, and are seeking to borrow. When you apply for a loan, ask for as little as possible. The amount you owe makes up 30% of your FICO credit score. The less you owe, compared to what you could borrow, raises your credit score and can lower your loan interest rates.
Keep a tight rein on your expectations
Banks have a specific protocol for loan approval. During this process, make sure you know the sequence of events; although some loans can be “preapproved” instantly, the terms and conditions may not be available for days or weeks after the initial loan request is processed. Ask your loan office for advice on following up on your loan application.
The loan application process can be a daunting prospect; if the worst happens, and your loan is not approved, ask your lender for specific reasons behind their denial of your application. Be cautious about applying to other lenders. Too many loan applications submitted at around the same time can hurt your credit rating, and affect your chances of securing a loan approval moving forward.