How to Get Approved for a Personal Loan in 2024

Over the years, more and more people have been turning to personal loans to fund a variety of financial needs, from consolidating debt to financing large purchases. In fact, 23.2 million Americans had unsecured personal loans in the third quarter of 2023, according to TransUnion.

When applying for a personal loan, you typically need to meet a minimum credit score and income and debt-to-income (DTI) ratio, among other criteria, to get a loan approval. Because these eligibility requirements vary by lender, you can increase your chances of being approved by only applying with lenders who match your borrower profile.

MoneyGeek compiled a list of tips and requirements to help you prepare for the application and improve your chances of loan approval.

Securing approval for a personal loan can significantly impact your financial flexibility. By following these tips, you can enhance your loan application and boost your chances of approval.

Lenders often set a minimum credit score requirement to assess the risk of lending money. This score helps them determine your creditworthiness or how likely you are to repay the loan. An ideal credit score for obtaining a personal loan varies by lender. A score of 670 or higher generally falls into the good credit range, increasing your chances of approval and securing better loan terms.

To check your credit score, you can request a report from one of the three major credit reporting agencies: Equifax, Experian or TransUnion. You’re entitled to a free credit report from each of these agencies once per year, making it easy to regularly monitor your score.

After determining your current credit score, the next step is to focus on improving it, which you can do by:

Focusing on these areas can improve your creditworthiness and increase your chances of getting approved for a personal loan. Each step contributes to a healthier credit profile, demonstrating to lenders that you can manage your finances responsibly.

When evaluating loan applications, lenders look into your debt-to-income (DTI) ratio to gauge your ability to manage monthly payments on top of your existing debt. A lower DTI indicates a good balance between debt and income, making you a less risky borrower. Ideally, for a personal loan, lenders look for a DTI ratio of 36% or lower, though some may accept higher ratios.

To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income. This includes payments on credit cards, loans and other financial obligations — but not living expenses like utilities and rent. Then, multiply the result by 100 to get the percentage.

Knowing your DTI ratio paves the way for strategies to reduce it, mainly by decreasing your debt or increasing your income. To lower your debt, start by paying off high-interest debts such as credit card balances to reduce your monthly financial burden. Another effective method is consolidating multiple debts into a single loan with a lower interest rate, simplifying your payments and potentially reducing your monthly outgoings.

On the flip side, increasing your income can also positively impact your DTI ratio. Consider opportunities for career advancement that could lead to a higher salary, such as taking on more responsibility at work or seeking promotions. Exploring side hustles or part-time jobs can also provide additional streams of income.

Finding the right lender will boost your chances of loan approval, as each type of lender caters to different borrower profiles and needs.

Identifying a lender that matches your financial situation is key to enhancing your approval chances. For instance, those looking to consolidate debt may explore lenders that excel in debt consolidation loans. Utilizing online tools to compare terms, rates and eligibility criteria across various lenders can also guide you to the right choice.

Additionally, getting prequalified can provide insight into your chances of approval without harming your credit score, allowing you to apply with confidence.

The size of the loan you request has a direct impact on a lender's decision, as it reflects your borrowing needs and repayment ability. Lenders evaluate the requested amount to ensure it aligns with your financial situation, including your income, debt-to-income ratio and credit score. Requesting an amount that is too high can raise concerns about your ability to repay the loan, potentially leading to a denial.

You can determine how much you need by knowing the purpose of the loan. Whether it's consolidating debt, financing a home improvement project or covering unexpected expenses, understanding exactly why you need the funds helps you calculate the precise loan amount to request.

Additionally, use a personal loan calculator to assess your financial capacity to repay the loan. These online tools can help you estimate the monthly payments for different loan amounts and terms, allowing you to adjust your request based on what you realistically can manage without straining your finances.

Considering a co-signer for your personal loan application can play a pivotal role in improving your eligibility, particularly if your credit profile or income doesn't fully align with a lender's criteria. By agreeing to share the responsibility for the loan, a co-signer provides lenders with an added layer of assurance. This often leads to a higher likelihood of approval and may result in more favorable loan conditions, such as reduced interest rates.

When choosing the right co-signer, consider the following:

• Strong Credit Score: Choose someone with a good to excellent credit score. A co-signer with a strong credit history reassures lenders of the loan's repayment, increasing your chances of approval.

• Stable Income: Ensure your co-signer has a stable and sufficient income. This indicates the financial capacity to cover the loan payments if you're unable to, further securing the loan.

• Trustworthy Relationship: Opt for a co-signer with whom you have a trusting relationship, like a close family member or friend. This mutual trust is helpful as you'll share financial responsibilities that can affect your financial future.

Remember that there's a significant responsibility placed on the co-signer's shoulders, as any failure to keep up with payments could negatively impact their credit and financial standing, potentially putting personal relationships at risk.

Lenders ask for various documents to assess your financial health and repayment capability during the application process. A clear understanding of these requirements streamlines the application process and increases your chances of loan approval by showcasing your reliability as a borrower.

Knowing the steps to the personal loan application process is beneficial because it prepares you for a smooth and efficient experience. Being informed helps minimize errors and increases the likelihood of approval by ensuring you meet all the lender's requirements from the start.

We addressed some commonly asked questions about personal loans to help you learn more about this type of loan and increase your chances of getting approved.