Personal loans are an incredible financial tool. It’s fast, secure, convenient, and best of all, it can be used for just about anything you can think of. Consolidate debts, make improvements to your home, cover unexpected expenses, pay for a special occasion, take a vacation… the list goes on.
If you’re thinking about getting a personal loan, here are some tips you can use to get a rate you’ll appreciate (and your wallet!). Let’s start with a brief overview of some personal loan requirements that you will need to consider before applying.
What is a personal loan and how do I get it?
A personal loan is a lump sum of money that you borrow from a lender and pay back in fixed monthly payments – or installments – over a certain period of time.
There are some general criteria involved in qualifying for a personal loan that you must understand before submitting your application, but remember – requirements often vary from lender to lender.
If you are hoping to qualify for a low annual rate loan, decent credit is essential. In general, a credit score in the 640+ range is good enough to get approved for a personal loan. However, the higher your score, the more likely you are to accept loans at lower rates.
get low Debt to Income Ratio It is another prerequisite to consider when applying for a personal loan. Does your income exceed your debts? If so, how much? The lower your debt-to-income ratio, the better your chance of getting a low-interest personal loan.
Finally, you will have to show the lenders that you have the means to pay off your loan. Proof of income in the form of W-2s, salary stubs, bank statements, or tax returns may be necessary for approval.
Now that you have an idea of what you’ll need to qualify, we’ll share some tips on how to achieve a better APR for your future personal loan.
What is the debt-to-income ratio and why is it important?
The debt-to-income ratio (DTI) is a personal finance measure that compares your total debt to your gross income. Lenders use this ratio to determine the borrower’s ability to manage the monthly payments and repay the money they want to borrow from.
When it comes to getting approved for a low APR personal loan, the lower the debt-to-income ratio, the better. With a low DTI, you are more likely to receive the loan amount you are looking for at a great rate because lenders can see that you are already doing a good job managing your existing debt.
In other words, a low DTI shows lenders that you’re not spending more money than you can afford. As you can guess, the higher DTI ratio tells them exactly the opposite. From the lender’s perspective, borrowers with high DTI ratios already have debts that are too large to manage effectively. They will almost not be willing to lend to borrowers with a high DTI level because they are unsure if they can handle the additional financial obligation.
Focus on lowering your DTI, and your chances of getting a better APR will be much higher.
Debt to Income Ratio Distribution
So – what is a good debt-to-income ratio? The Consumer Financial Protection Bureau and other experts agree on three general thresholds to consider:
Level 1 – 36% or less: If your DTI is 36% or less, you are likely in a strong financial position and may be a good candidate for a low APR personal loan.
Level 2 – less than 43%: If your DTI is less than 43%, you are probably in a comfortable financial position at the moment, but it may be time to look at ways you can reduce your debt. You may still qualify for a personal loan, but the rates may be much higher.
Level 3 – 43% or more: If your DTI is above 43%, you may feel that your monthly payments are a little more than you can comfortably handle. At this level, lenders may assume you have more debt than you can handle and may not agree to take out new credit.
Calculate your DTI ratio
Knowing your debt-to-income ratio in advance ensures that you won’t encounter any unexpected surprises when applying for new credit. To calculate your payments, simply divide your recurring monthly debt payments (mortgage, credit card minimums, loans, etc.) by your total monthly income. Take a look at the example below:
Car payment: 350 dollars
Student loan payment: $150
Mortgage Payment: $1,200
Minimum credit card payment: $35
DTI حساب Account
Recurring Monthly Debt = $1,735
Total monthly income: $4,000 4000
Calculate DTI Ratio: 1735/4000 = 0.43375
Once you complete the calculation, move the decimal point two places to the right and you will get the DTI ratio in percentage form. In the example above, the borrower’s DTI would be 43%.
How can I lower my DTI?
DTI Ratio Higher Than You Want? To lower your DTI, you have three options: pay off your debt, increase your income, or do both at the same time. It won’t go down overnight, but if you follow the suggestions below, you may see a huge drop in your DTI before you know it.
Try these tips to start lowering your DTI:
- Pay more than the minimum monthly debt payments
- If possible, avoid taking on more debt than you already have
- Increase your income by taking on a part-time job or finding a profitable side business
- Keep your budget tight and reduce any unnecessary spending
While your DTI is just one measure of your financial health, it’s still important to pay close attention to it — especially when you’re looking for new credit.
Next, let’s go over some of the credit score requirements you’ll want to consider when you’re seeking a low annual percentage rate personal loan.
What credit score do I need for a personal loan?
In general, the higher your credit score, the lower your APR will qualify you. You’ll usually need a credit score of 640 or higher to qualify for a loan, but again – requirements can vary widely across lenders. If your credit score is less than 640, the options are likely available, but they may come with higher interest rates than you intended.
To receive an APR that works for you and your budget, you will need to prioritize raising your credit score. (You can track your credit score for free at mint application)
How can I improve my credit score?
Improving your credit score takes time, effort, and dedication, but the benefits that a higher credit score can have on your financial health are impressive.
To improve your credit score, focus on:
Make payments on time: Your payment history determines a staggering 35% of your credit score, which means making payments on time is critical if you’re working to raise it. One payment on time likely won’t improve your score much, so you’ll have to make consistent payments on time to see a significant increase.
Pay off credit card debt: Depending on your credit line, Carrying large balances on your credit cards can negatively affect your credit score. It all comes down to your credit utilization ratio, or how much credit you use compared to the amount of credit lenders have given you. VantageScore Experts usually recommend using less than 30% of your available credit to improve your score, but the less you use, the better.
Avoid opening multiple new accounts: In general, Vantage borrowers who open multiple new accounts within a short period of time are considered riskier. Therefore, if you are applying for many different credit cards and loans at the same time, you may notice a drop in your score. To combat this, it is wise to take some time to research the options that are best for you and your needs before applying.
NB: Opening just one new account may lower your score slightly. As long as you manage your new balance responsibly, it should bounce back quickly.
Well, all that remains is a brief summary to get things done. If you are looking for a low priced financial product that can give you the money you need in less than one business day, here is what you want to keep in mind:
A high credit score is your friend: The higher your credit score, the more likely you are to be approved for a personal loan at a low annual rate. To qualify for a personal loan, aim for a credit score of at least 640. If you can get it higher than that, lower rates may be your way.
The lower your DTI, the better: Low DTI ratio It shows lenders that you have good control over your debt. Aim for 36% or less of your DTI to be eligible for the best rates.
Proof of income may be required: Whether it’s a W-2 form, a payroll stub, a bank statement, or a tax return, lenders want to see proof of your ability to pay them. When it’s time to apply, it’s a good idea to have these documents ready.
Do you still need help?
Still have questions or concerns? If you are interested in learning more about your options for getting a personal loan, check this out bestegg.com or visit Best Egg Blog To access tips, tools and additional financial information.