When you make a request for Personal loan, you want to maximize your chances of being approved. After all, when you need money, there is nothing more frustrating than a lender who turns down your loan application.

To make sure you aren’t disappointed with an unexpected refusal, it helps to understand some of the key factors lenders take into account when deciding whether or not to approve you for a loan. Obviously your credit rating is one of the main deciding factors because your score provides tons of information about your borrowing behavior. But that’s not the only thing personal lenders look at when deciding whether or not to give you a loan.

In fact, a number of other factors besides your credit could affect the approval of the personal loan, including your employment history; the amount of your income; how much other debt you have; if you have applied for many loans; and if you pledge collateral.

Let’s take a closer look at some of these other factors to better understand their impact on the likelihood that you will be able to get a personal loan.

1. Your income

Lenders don’t want to give loans to people who can’t pay them back. So when you apply for a loan, financial institutions are naturally very concerned about the amount of income you have available to make the loan repayments.

If you are trying to borrow for a loan that would have monthly payments of $ 1,000 but your total monthly income is only $ 1,500, this is a major red flag for a lender that you will be struggling. to pay. But if your loan has payments of only $ 100 per month and your monthly income exceeds $ 5,000, then you have a much better chance of being approved for a loan since the payments are such a small percentage of what you earn. .

2. Your employment history

For most people, income comes from employment. Lenders want to know if your employment situation is stable or if you are likely to lose your job – and your source of income – at any time.

Of course, lenders don’t just call your boss and ask if they plan to fire you soon. Instead, they’ll usually review your recent employment record. If you’ve been in the same job for a year or two, the financial institution will generally consider it a fairly likely bet that you will continue to work with the company. On the other hand, if you’ve only recently got a new job or been promoted to a higher pay level, lenders may not view this income as very reliable.

When assessing the amount of income you have available to repay the loan, it is common for lenders to consider only the income you have earned in the past 24 months. So if you’ve earned $ 50,000 in the past three years, but got a raise of $ 75,000 per month before you apply for a loan, lenders will likely assess your loan application as if you haven’t yet. won that $ 50,000. This lower income will determine how much you are allowed to borrow or whether your loan is approved.

3. Other debts you owe

It’s not just your income that determines whether you’re likely to repay your loan – other debts you owe can also have an impact. If you’re already in debt, lenders won’t exactly line up to give you another loan. After all, if you owe a fortune, any minor drop in your income could prevent you from meeting all of your existing financial obligations.

To assess the likelihood of loan repayment, lenders compare your monthly debt payments to your monthly income. This ratio is called your debt-to-income ratio (DTI). Different personal lenders have different maximum DTIs, but many require your debt payments to be less than about 35% of your income. If you exceed the maximum ratio with a particular lender, your loan application will be refused.

4. If you’ve applied for a lot of loans recently

Another red flag for lenders comes when you submit tons of credit applications in a short period of time. If you’ve suddenly gone on a borrowing frenzy, financial institutions are very concerned that you are overwhelmed and that default is likely in your future.

Lenders can see how much credit you recently requested by looking at the number of inquiries on your credit report. Whenever you apply for credit, such as applying for a personal loan, mortgage, or credit card – a serious investigation is placed on your report. These surveys remain there for two years. If you have received 10 inquiries recently because you applied for 10 different loans, lenders may be reluctant to lend you.

There is one exception though: you can search for loans without getting ripped off. In other words, if you have a few personal loan inquiries a few weeks apart but no new loans have appeared on your credit report, lenders will likely assume that you are simply comparing rates and the terms of the loans and you don t be penalized in the loan approval process.

Of course, if you don’t want to take a risk, you can look for personal lenders who don’t need extensive inquiries to pre-approve you loans or give you details of what rate you’re likely to be. eligible.

5. Whether a collateral will secure the loan

Sometimes you will have many factors that prevent you from qualifying for a personal loan, such as a low credit score, limited income, or a history of many past job changes. Although many lenders will not want to lend to you in these circumstances, some financial institutions offer secured personal loans which can be much easier to obtain.

With a secured loan, there is collateral – like money or other assets – that secures the loan. The lender has a legal interest in the collateral, and the collateral can be foreclosed on if you don’t pay what you owe. Since lenders could take collateral to cover their costs if you don’t pay, the risks to lenders are limited and loan approval becomes much more likely.

Understand how personal loan approval works before you apply

Understanding the factors lenders consider when deciding who to lend money to can help put you in the best position to get approved. By avoiding applying for too many loans and trying to keep your income and employment stable, you can maximize your chances of not only getting a loan, but also getting approved to borrow at a great rate. so that your loan costs less to repay over time. .