7 Ways To Improve Your Personal Loan Application

No matter your reasons for pursuing a personal loan, it’s important to put your best foot forward. Why? Because you could save a lot of money. For instance, a rate reduction of a single percentage point could save you around $600 on a five-year, $20,000 loan. Reduce the rate by three percentage points, and that’s $1,800 saved. The more money you aim to borrow, the more a lower rate could cut your costs.

So how do you do it? Start by considering what lenders look at in order to gauge your eligibility and determine your rate — your credit score and history, income, debt-to-income ratio (DTI), and whether you’re applying with a cosigner or co-borrower, among other factors. Identifying how you can improve each element of your application (or if you need to), could be well worth the effort. 

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1. Improve your credit score

While it’s best to have some lead time to make the biggest gains, you may still be able to make small improvements in your score over a short period of time. Helpfully, many apps and websites that tell you your credit score also indicate what factors could be bringing yours down:

• Payment history (35%): Your payment history accounts for the largest portion of your credit score. Lenders want to see a long and strong history of on-time payments. By paying your credit card and loan bills on time every month, you can build your credit score over time.
• Amounts owed (30%): If you use most of your available credit, this can indicate a higher level of risk to lenders. To improve your score, aim to use less than 30% of your available revolving credit. You might also consider consolidating credit card debt to reduce your interest rate, monthly payment, and/or credit utilization. This could lead to gains in your score and may decrease your DTI, as well. But since it involves taking out a new loan, your score could also take a temporary hit.
• Length of credit history (15%): A longer credit history can help improve your score. Avoid taking out new credit that could lower the average age of your accounts — unless the potential gains could offset the possible downsides, like when consolidating high-interest credit card debt at a lower rate.
• Credit mix (10%): Having a mix of credit types, such as credit cards, installment loans, and a mortgage can show lenders that you’re capable of managing different types of credit. Since opening new accounts is generally not a good idea before applying for a loan, you may not want to make any changes here.
• New credit (10%): If you have multiple applications for new credit in a short period of time, this can negatively affect your score. Each time you apply for credit, a hard inquiry is performed, which can cause a drop in your score. If you’re trying to improve your score, only apply for credit when necessary.

Any time you apply for new credit, the lender will perform a hard credit pull. This allows it to review your credit history and gauge how risky it would be to lend you money. Creditors also use your score to help determine your annual percentage rate (APR) and lending terms. Generally, a higher credit score indicates less risk to the lender and leads to a lower rate, which can help you save money over time.

Learn More: Does Applying for a Loan Hurt Credit?

2. Reduce your DTI

Your DTI is another major factor lenders consider when you apply for new credit. Your DTI represents how much of your monthly income goes toward debt repayment. It helps lenders determine if you can realistically afford to take on more debt. To calculate your DTI, add up your minimum monthly debt payments and divide them by your gross (pretax) monthly income.

For example, if you owe $2,000 each month toward debt, and you bring in $8,000 before taxes, your DTI would be 25%.

While each lender has different criteria for evaluating DTI, there are a few rules of thumb you can use:

• If you own a home: Lenders generally want to see a DTI of 36% or less, but some will accept as high as 43%. This includes your mortgage.
• If you rent: Aim for a DTI of 15% to 20% or less. This doesn’t include your rent.

If your DTI is higher than is recommended, look at your budget and see what you can do to lower your monthly debt payments.

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3. Increase your income

During the application process, lenders will want to ensure you have steady employment and enough income to cover your debts. A higher income can improve your personal loan application or help net you a higher loan amount.

To increase your income, consider taking on a part-time job or even a few-hours-per-week side hustle. Many services like Uber, Fiverr, TaskRabbit, Instacart, and DoorDash can make it easy to start earning extra cash.

If you do shift work, see if you can take on extra shifts to increase your income. Or, if you’ve been performing well at your job, consider asking for a raise.

Learn More: How Much of a Personal Loan Can I Get?

4. Prequalify before you apply

Many lenders allow you to prequalify for a personal loan before going through the formal application process. Prequalification involves a soft credit check, which doesn’t hurt your score and can give you an idea of what APRs you may be approved for, as well as possible loan amounts and repayment terms. This can make it easier to compare lenders and decide which you’d like to apply with. While a useful tool, however, prequalification is not an offer of credit, and your final rate may differ. When you proceed to apply for a loan, the lender will conduct a hard credit pull, which can temporarily lower your score.

When you prequalify for a personal loan, the lender will typically ask for the following:

• Personal information: Your name, date of birth, address, if you rent or own a home, monthly housing costs, Social Security number, and phone number.
• Size of loan: Estimate how much money you think you’ll need.
• Purpose: Why are you looking for a loan? For example, to pay off high-interest debt, or for a home improvement project.
• Employment situation: Are you a full-time employee, self-employed, or retired?
• Annual income: How much do you earn before taxes? Income includes any wages, investment income, retirement income, etc.

Learn More: What Are Personal Loans Used For?

5. Add a cosigner or a co-borrower

A cosigner agrees to pay your loan if you default. Adding a cosigner to your application can help you get a loan if you wouldn't otherwise qualify or can lower your rate. In the lender’s eyes, the cosigner is equally responsible for the loan. So if you fail to make payments, they’re on the hook. A cosigner should have good credit and income, and a low DTI to improve your loan application.

A co-borrower, or joint applicant, could also help you get a loan. Like a cosigner, they’re equally responsible for loan repayment and should have good credit and a strong financial profile. But, unlike a cosigner, they have legal access to loan funds. In a co-borrowing situation, you each have access to the money and equal responsibility for payments.

Adding either a cosigner or co-borrower can help to increase your application for a personal loan. While many lenders accept joint applicants, only a few offer personal loans with a cosigner.

Learn More: Co-applicant vs. Cosigner

6. Apply for a secured personal loan

Applying for a secured personal loan is another way to increase your chances of getting approved for a personal loan or landing a lower rate. With a secured loan, you can reduce the risk to lenders by putting up an asset as collateral. Common assets include your home, car, or investments.

While adding collateral to a personal loan may improve your application, it’s important to consider the consequences if you default — the lender can use your collateral to recoup its money by seizing and selling it.

7. Apply for a smaller amount

While it might be tempting to apply for a larger-than-needed loan amount, just in case, it may not be worth it. This is because the larger your loan, the harder approval may be, or the higher your interest rate.

Run the numbers to see how much you need, and request that amount. If you’re getting a loan for debt consolidation, you should be able to calculate a nearly exact figure. The same goes for financing a large purchase. If you’ll use the proceeds for home improvement, however, you may want to ballpark the amount, then add 5% to 20% of the loan amount to accommodate unexpected expenses.

Can you refinance a personal loan?

If you don’t have time to wait to improve your credit, you could potentially take out a loan now and refinance later — ideally at a lower rate once your credit has improved.

When you refinance a personal loan, you take out a new loan with a better interest rate or terms, and use it to pay off your current loan. The goal of refinancing is to reduce the cost of the loan and/or your monthly payment.

While these are uncommon, check with your lender to see if it charges a prepayment penalty for paying the loan off early.

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Personal loan alternatives

Depending on your specific borrowing needs and wants, you might want to check out some personal loan alternatives, including:

• Credit card: Credit cards can offer quick access to money, but generally at a much higher rate, on average, than personal loans. Exception: a 0% APR credit card could be a good way to finance a large purchase or consolidate debt if you can pay off the amount financed within the introductory 0% APR period.
• Home equity loan or HELOC: If you’ve built equity in your home, you might be able to borrow against it. Lenders typically don’t want to lend you more than 80% of your home’s equity (including your original mortgage). For example, if your home is worth $500,000, and you owe $350,000, you may be able to borrow up to $50,000 via a home equity loan or home equity line of credit (HELOC).
• Personal line of credit: With a personal line of credit, you can borrow what you need, and only pay interest on what you use. Like a personal loan, a personal line of credit is unsecured, meaning you don’t have to put your home or another asset up as collateral.
• 401(k) loan: If you have a 401(k), you might be able to borrow from it. But tread carefully, as it’s often not advisable to mess with your retirement, and repercussions can be steep if you can’t pay a 401(k) loan back, including tax consequences.

Learn More: 401(k) Loans vs. Personal Loan