A loan application is your introduction to a lender and their capital. Whether you’re applying for a personal loan, auto, loan, or mortgage, you definitely want to put your best forward to increase your odds of approval.

Still, it is hard to know what you should do if you don’t know what the lender wants to see. The following are common factors lenders may consider.

Your Credit Reports & Scores

Almost all lenders look at your credit reports and credit scores to determine your credit worthiness. Even though credit plays a big part, it isn’t necessarily the deciding factor with all lenders. Some will lend to you if you earn a steady income, even if you have less than ideal credit.

Certainly, a poor history of managing credit gives most lenders pause. They want to see you’re responsible and will probably repay the loan. Still, they may lend to you even if you have bad credit, but don’t expect the best rates and terms.

Always try to maximize your credit scores before you complete a loan application. Not doing so is one of the most common loan application mistakes. You may also want to check out these other reasons why loan applications are often denied.

Income Amount & Source

The loan application process always includes an assessment of your income. Traditional lenders tend to favor those with full-time jobs, but that doesn’t mean you should avoid loan applications if you earn money in other ways. Alternative lenders tend to be much more forgiving.

These lenders often welcome clients with income from less common sources such as self-employment, disability, pensions, and more when you fill out an online loan application form. They may also have lower income requirements.

Work, Home & Banking Stability

It’s not surprising that mainstream lenders want to see a consistent income over many years. They also prefer customers that bank in the same place and live in the same home for some time. They believe these people are more reliable and more likely to repay their loan.

Fortunately, not all lenders have such exacting requirements. We live in a mobile world and it isn’t always possible or desirable to stay put. Some alternative lenders recognize this and only want to see a stable history of a few months.

Debt-to-Income Ratio

This is a big consideration when you make loan applications. It examines how much monthly debt you already have compared to how much you earn each month. If you are carrying a lot of debt, they may not want to lend you more money.

Most lenders suggest your DTI ratio should be less than 43%. However, there’s no single threshold that guarantees approval. Still, the lower your debt-to-income ratio, the more likely a lender will offer you good terms on a loan.

If your DTI is higher than 43%, definitely get in down before you make loan applications. That could involve paying down debts or increasing your income. Don’t assume lenders will approve you just because you have good credit and a high income. That’s another of the most common loan application mistakes.

Collateral Value for Secured Loan

Some people can’t qualify for a loan without backing it with collateral such as a vehicle, house, or other asset. Using collateral has an advantage though – you usually enjoy lower interest rates.

The value of your collateral also determines how much you can borrow. If you own valuable assets you may be able to borrow more easily and your cost to borrow should be lower.

Down Payment Amount

In some cases, lenders may want to see you make a down payment when you make a loan application. This is common when you buy a car. The more you put down, the less you borrow from them and the more vested you are in the loan process.

However, some lenders allow you to make an application for a personal loan without a down payment. In this case, approval rests entirely on other criteria and every lender has their own. Even if one lender turns you down, you could be approved by another.

Liquid Assets

Lenders look favorably on assets you own such as cash, investments, and T-bills. These assets provide them with added security should you experience a temporarily setback such as losing your income. You can access these and still pay your loan payments.

Ironically, many lenders are more likely to lend you money when you already have some. Always include all liquid assets on your loan application form, if the lender asks you to list them, even if you think it’s none of their business. Not doing so is another one of the most common loan application mistakes.

Term Length

Generally, lenders want you to pay off your loan as quickly as possible. That’s because your personal circumstances can change during the life of your loan.

You’re approved based on the information provided in your initial loan application, but you could lose your job or take on more debt making it harder for you to pay back your loan. Consequently, lenders are more likely to approve you for a loan with a shorter, rather than a longer term.

Obviously, it isn’t always possible to choose a short term when you’re making a big purchase. Nonetheless, you should always choose the shortest term you can comfortably afford. This not only increases your chances of approval of your loan application, it also means you’ll pay less interest. Just remember a short term also leads to higher payments.

How to Optimize Your Chances of Loan Approval

Now that you understand many of the factors that lenders consider when assessing loan applications, you probably want to know how you can increase your odds of success. Luckily, there are plenty of things you can do to optimize your chances of loan approval before you apply.

The following is a summary of the most important things you can do to solidify your chances. Most revolve around creating and maintaining good credit and behaving in a way lenders prefer.

Clean Up Your Credit Reports

We can’t emphasize this enough – clean up your credit reports BEFORE you make loan applications. Mistakes on credit reports are very common and even small ones can impact your credit scores.

You may have noticed that we’ve used “reports” not “report” here. That’s because you have one with each of the three credit reporting agencies: Transunion, Equifax, and Esperian. Luckily, you can obtain all three reports annually for free at annualcreditreport.com.

So, what should you look for when you’re reviewing your reports? The Consumer Finance Protection Bureau provides in-depth information on what to look for. Set aside an hour, scour your reports, and dispute any errors. Your credit reports include directions on how to do so.

Make Timely Payments

This may seem obvious, but it is crucial to maintaining good credit. Your credit history accounts for the lion’s share of your credit scores (around 35%). If you’re late or miss a payment it will definitely affect your credit reports and credit scores.

Consolidate or Pay Off Debt

When possible, reduce the amount of debt you are carrying. This always makes lenders more likely to lend to you. This is particularly true if your debt-to-income ratio is higher than it should be.

If you are struggling to manage multiple small debts, you can make an application for a personal loan to consolidate your debts. This simplifies your finances, because you pay a single payment. If most of your debt is from credit cards, you should also pay less, because you pay simple, not compound interest.

Consolidating your debt can also improve your credit scores. Lenders like to see accounts paid in full, you’ll lower your credit utilization ratio, and may also increase your credit mix. Your credit mix evaluates the diversity of your credit types such as credit cards, installment loans, and mortgages. It accounts for about 10% of your credit scores.

Make A Loan Application Through the Right Company

Every lender has specific criteria they look at when assessing loan applications. Generally, mainstream lenders have a stricter, more complicated loan application process. Alternative lenders often operate remotely and accept an online loan application. Their loan application process is usually much quicker and simpler.

However, you must be very careful when you make loan applications. Too many at once through lenders that use hard credit inquiries can lower your credit scores.

Fortunately, it is possible to avoid this, which is one of the most common loan application mistakes. Choose a company with access to many lenders that use soft credit inquiries.

Improve Your Odds of Approval Through FlexMoney

FlexMoney’s extensive network of lenders offers you an easy, safe way to discover whether you can access credit. Complete one personal loan application form and we’ll immediately show you what’s available to you. Compare interest rates and terms and find the best, quickly and easily.

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