Personal loans are an incredible financial tool. They’re fast, safe, convenient, and best of all. They can be used for almost anything you can think of. Consolidate debt, make home improvements, cover unexpected expenses, pay for a special occasion, take a vacation … the list goes on.
If you’ve been considering getting a personal loan, here are some tips to help you get an interest rate that you (and your wallet!) Will appreciate. Let’s start with a quick overview of some of the personal loan requirements that you need to consider before you apply.
What is a personal loan and how do I get one?
A personal loan is a lump sum that you borrow from a lender and repay over a period of time in fixed monthly payments – or installments.
There are some general criteria for qualifying for a personal loan that you should understand before submitting your application. Note, however, that the requirements often vary from lender to lender.
If you want to qualify for a loan with a low APR, decent credit is a necessity. Generally, a credit score in the 640+ range is good enough to get you approved for a personal loan. The higher your score, the more likely it is that you will be approved for low interest rate loans.
A low debt to income ratio is another important requirement for applying for a personal loan. Does your income exceed your debt? If so, by how much? The lower your debt-to-income ratio, the better the chance that you will secure a low-interest personal loan.
Finally, you need to show the lenders that you have the means to pay back your loan. Proof of income in the form of W-2, pay slips, bank statements, or tax returns may be required for approval.
Now that you have an idea of what it takes to qualify, here are some tips on how to get a better APR on your future personal loan.
What Is Debt To Income Ratio And Why Is It Important?
Your Debt-Income Ratio (DTI) is a personal financial measure that compares your total debt to your total income. Lenders use this ratio to determine a borrower’s ability to manage monthly payments and repay the money they wish to borrow from them.
When it comes to getting approved for a low APR personal loan, the lower your debt to income ratio, the better. With a low DTI, you are more likely to get the loan amount you want at a low cost because lenders can see that you are already well managing your current debt.
In other words, a low DTI rate shows lenders that you are not spending more than you can afford. As you can imagine, a higher DTI ratio says the opposite. From a lender’s perspective, borrowers with high DTI rates already have too much debt to manage effectively. They are nowhere near as willing to loan out to high DTI borrowers because they are unsure whether they can meet the additional financial obligation.
Focus on lowering your DTI ratio and your chances of getting a better APR will be much higher.
Breakdown of Debt to Income Ratio
So – what is a good debt to income ratio? The Consumer Financial Protection Bureau and other experts agree on three general thresholds to consider:
Tier 1 – 36% or less: If your DTI ratio is 36% or less, you are likely to be in solid financial condition and may be a good candidate for a low APR personal loan.
Tier 2 – Less than 43%: If your DTI rate is less than 43%, you are probably in a comfortable financial position right now. However, it may be time to start thinking about ways you can reduce your debt. You may still be eligible for a personal loan, but the interest rates can be significantly higher.
Tier 3 – 43% or more: If your DTI rate is higher than 43%, you may feel that your monthly payments are a little higher than you can comfortably handle. At this level, lenders can assume that you have more debt than they can handle and you may not be approving new loans.
Calculating your DTI ratio
If you know your debt-to-income ratio beforehand, you will not encounter any unexpected surprises when applying for a new loan. To calculate yours, simply divide your recurring monthly debt payments (mortgage, credit card minimum, loans, etc.) by your total monthly income. Take a look at the following example:
Car payment: $ 350
Student Loan Payment: $ 150
Mortgage Payment: $ 1,200
Minimum payment by credit card: USD 35
Recurring Monthly Debt = $ 1,735
Total Monthly Income: $ 4,000
Calculation of the DTI ratio: 1735/4000 = 0.43375
When you’re done calculating, move the decimal point two places to the right and you have your DTI ratio in percentage form. In the example above, the borrower’s DTI ratio would be 43%.
How can I lower my DTI ratio?
Higher DTI ratio than you’d like? To lower your DTI rate, you have three options: pay off your debt, increase your income, or do both at the same time. Your rate won’t go down overnight, but if you follow these suggestions you may see a significant decrease in your DTI rate before you know it.
Try these tips to lower your DTI ratio:
- Pay more than your minimum for monthly debt payments
- Whenever possible, avoid taking on more debt than you already have
- Increase your income by getting a part-time job or finding a profitable sideline
- Keep your budget tight and cut unnecessary expenses
While your DTI is just a measure of your financial health, it’s still important to pay close attention – especially when looking for new credit.
Next, let’s go over some creditworthiness requirements that you should consider when looking for a low APR personal loan.
What credit do I need to get a personal loan?
In general, the higher your credit score, the lower the APR you will qualify for. Typically, you want a credit score of 640 or higher in order to qualify for a loan, but again, the requirements can vary significantly between lenders. If your credit score is below 640, options are likely available, but they may come with higher interest rates than you are aiming for.
To get an APR that works for you and your budget, prioritize increasing your credit score. (You can track your credit score for free in the Mint app)
How can I improve my credit rating?
Improving your credit score takes time, effort, and commitment, but the benefits that a high credit score can have on your financial health are remarkable.
To improve your credit score, focus on:
On-time payments: Your payment history drives a staggering 35% of your creditworthiness, which means that on-time payments are absolutely crucial if you are working to increase them. A single on-time payment is unlikely to improve your score much. So you need to make consistent on-time payments to get any significant increase.
Pay off credit card debts: Depending on your credit limit, Carrying large amounts of credit on your credit cards can have a negative impact on your credit score. It all depends on your credit history or how much credit you are using compared to the amount lenders have given you. VantageScore experts typically recommend using less than 30% of your available credit to improve your score. The lower your workload, the better.
Avoid opening multiple new accounts: In general, Vantage considers borrowers who open multiple new accounts in a short period of time to be riskier. So if you apply for many different credit cards and loans at the same time, your score may drop. To counter this, it is a good idea to take some time before applying to identify the options that are most suitable for you and your needs.
Note: Just opening a new account can cause your score to go down slightly. As long as you manage your new credit responsibly, it should recover quickly.
Okay, all that’s left is a quick recap to wrap things up. If you are looking for a great value financial product that will give you the money you need in just one business day, here are some things to consider:
A high credit score is your friend: The higher your credit rating, the more likely you are to be approved for a low APR personal loan. To qualify for a personal loan, aim for a credit score of at least 640. If you can get higher value, lower interest rates could come your way.
The lower your DTI ratio, the better: A low DTI rate shows that lenders are in good hands with your debt. Aim for a DTI rate of 36% or less for the best prices.
Proof of income may be required: Whether it’s a W-2 form, a payroll, a bank statement, or a tax return, lenders want to see the evidence that you can pay them back. When it is time to apply, it is a good idea to have these documents ready.