A personal loan is an installment loan that most people apply to get over a financial emergency, pay down previous debts, make big purchases, or cover unexpected expenses. In most cases, a personal loan ranges from $1000 to $50000. You can apply for this unsecured loan through banks, financial institutions, online lenders, and credit unions.
You can choose from a wide range of personal loans like home improvement, weddings, debt consolidation, and medical loans. According to your credit score, payment history, and income, the money lender will determine whether you qualify for the loan or which interest rates you can access.
However, before applying for any type of personal loan, you need to know the various qualification factors, eligibility criteria, and steps involved in the application process so you know what to expect, and nothing will come as a surprise. For more information on personal loans in Alberta, visit this site.
How to qualify for a personal loan?
There is no specific formula for qualifying for a loan as every applicant has a different financial situation, and every money lender’s eligibility criteria vary. However, some general rules and recommendations can help you enhance your chances of qualifying for a personal loan from any financial institution.
Most online personal loan lenders analyze your credit score, annual income, and DTI ratio to determine your eligibility. The minimum requirements for each factor depend on the lender and the amount of loan you are applying for. You can follow these recommendations:
1. You are expected to have a minimum credit score of 670
Your credit score is one of the most critical factors which financial institutions evaluate while considering your loan application. Other factors are your payment history, length of credit history, and amount of outstanding loan.
Most lenders expect you to have a credit score of 600. However, to qualify easily and get the best interest rate, it’s a good idea to maintain a credit score of 670 or above.
2. Steady monthly income
The next eligibility criteria that lenders consider is your annual income. They ensure that you are earning enough so that you can repay the loan entirely without defaulting. Also, minimum income requirements vary from one financial institution to another.
But you must have a consistent and steady income to demonstrate to the money lender that you are earning enough to afford your monthly installments. Income evidence may include monthly bank statements, signed letters from your employer, and tax return documents.
3. DTI Ratio less than 36%
Debt to income ratio or DTI is a percentage that represents the applicant’s approximate monthly amount that they pay towards their monthly installments. Lenders use the DTI ratio to predict your eligibility to apply for loans.
This is why it is recommended that you have a DTI ratio of less than 36%. However, some money lenders might approve a highly qualified client with a ratio up to 50%.
Since every other money lender has its minimum requirements and eligibility criteria, it is recommended to pre-qualify as soon as possible. This will help you find the best personal loan as per your financial situation and requirements.
How to obtain a personal loan?
Let us discuss the application process required for obtaining a personal loan.
Step 1: Analysing your credit score and credit report
When talking about a personal loan, the credit score is the first thing most lenders and financial institutions consider. A good habit is checking your credit report on a credit score checking website once a year. Here you can also see your current loans, debts, and accounts that affect your score.
A Credit score ranges from 300 to 850. However, most money lenders expect you to have a minimum score of 600 to get approval for a personal loan. Apart from your credit report and history, various other factors will be considered, such as:
- Payment history
- Credit mix
- Amounts owed
- New credit
- Length of credit history
If a previous loan is affecting your credit score, then it is recommended that you pay off the previous loan and wait until your credit score improves gradually.
Step 2: Research various lenders and get free pre-qualified
You can quickly get a personal loan lender or a financial institution offering personal loans online. All you have to do is visit a lender’s website or a financial institution and enter basic details about yourself and what you need from a personal loan. Once you click submit, you will receive multiple loan offers, which you can compare and apply for.
You can also directly visit a financial institution in person. However, ensure that you pre-qualify as they will perform a hard check on your credit report. The best part of a personal loan is that you can discuss with the money lender precisely what amount you want and how long you want to borrow the amount.
In many cases, you can also discuss with them how much installment you can afford per month, and then the lender will find the perfect personal loan that will fit your monthly budget.
Step 3: Shop around
Once you have pre-qualified, the next step is to compare the quotes of the various lenders you have selected and find the lender offering the best interest rate. Each financial institution and money lender has its own criteria. So make sure you know about these factors and compare the best deals before selecting one.
Once you are satisfied with your decision and both the parties agree on a favorable interest rate, monthly installment amount, and repayment, the next step is to gather all the documents.
Documents that you need to submit while taking out a personal loan are:
- Address proof
- Proof of income like tax returns and pay stubs
- Personal identification documents like government-issued identity cards, birth certificates, passports, driver’s licenses, and social security number
Personal loans can be readily available via banks, online lenders, and credit unions. However, finding the perfect interest rate and other terms can be challenging. But, if the financial institution does not approve your personal loan application, you can always talk to experts.