Getting a loan approval is not easy, especially when you are just out of college and looking to carve out a career of your own with no record to testify your financial responsibility. In the wake of severe economic troubles across the globe, lenders are looking for more and more in a loan application and are incredibly stricter than ever. While there are numerous key areas that lenders focus on, it’s important that you do your homework well and present a complete package for review if you intend to get approved soon.
Here are a few crucial considerations to make before ensuring a seamless approval of your first loan.
Check Your Credit Score
Lenders make their lending decisions based on various elements, such as:
- Your housing situation (if you own your home or rent),
- A favorable income-to-debt ratio (indicating your ability to repay the loan regularly),
- And your credit history. This is where first-time borrowers tend to run into trouble.
What are the ways to build a positive credit score if I have no prior borrowing history?
If you have no prior borrowing history, your credit report won’t have enough data to make a lender’s decision in your favor, which could result in a loan rejection. However, there are ways to address this challenge, which we will discuss later. For now, it’s crucial to understand that providing proof of steady income from your employer and bank statements can show a potential lender that you have the financial capability to repay the loan in monthly installments.
Evaluate Your Earnings and Recurring Commitments
Your monthly earnings and financial responsibilities are key indicators of your capacity to repay a loan, so having strong evidence of income is essential for the loan application process and to demonstrate your ability to make timely payments. If you are self-employed, you’ll need to provide tax returns, invoices, and receipts from the past few years. If you are a salaried applicant, you’ll need to present pay stubs.
Ask your employer to help you
It’s recommended to request a letter from your current employer that includes your job title, current salary, and length of employment on the company’s letterhead. Online lenders tend to feel more confident when you have been with the same company for an extended period (more than 2 years), which demonstrates a higher level of financial stability.
The more income you show, the best it is
The amount of money you earn each month determines your ability to make the loan’s monthly payments. Be sure to consider all sources of income, not just your main one. This includes your spouse’s income, income from a part-time job, alimony, and child support. This will aid you in your application for a payday loan.
Ask a relative to serve as a guarantor
The most traditional method of obtaining a personal loan when you have no credit history is to utilize the creditworthiness of another person. A co-signer is someone who agrees to repay your loan if you are unable to do so. A close relative is the best choice, but you can also consider extended relatives if no other options are available.
You and your guarantor must be responsible
Regardless of the situation, it is your responsibility to make sure your co-signer fully understands their commitment. Keep in mind that your personal loan payments will also appear on their credit report, and if there are any issues in the future, their credit score could also be negatively impacted.
Focus on asking to high-credit rate relatives
Additionally, it’s important to note that selecting a co-signer with a strong credit score will increase your chances of obtaining a loan compared to choosing someone with an average credit score. Lenders want to ensure that the loan will be repaid, and a co-signer with a high credit rating gives them more confidence in the likelihood of timely repayment.
Begin Building Your Credit History Today
As you work towards getting a loan, it’s beneficial to start establishing a positive credit history through legitimate methods. Some lenders may view a limited credit history as insufficient, but if you can supplement it with other evidence of financial responsibility, such as bank statements, it may carry more significance.
Applying for a card is an effective way to create credit history early
While working on building your credit history, there are a few formal options to consider, such as opening a checking or savings account, or applying for a credit card. Gas and department store cards are often easier to obtain. To obtain a secured credit card, you’ll need to make a small deposit when you open the credit account. It’s important to note that the credit card issuer must report the information to the credit bureau if you want the card to have an impact on your credit history. This can be a useful strategy if you’re planning to apply for a loan, such as an e-transfer loan, in the future.
Applying for a loan can be a trying and complex process, especially when the loan is declined. The lender will typically provide an explanation for the rejection. It’s unwise to frequently apply for multiple loans without careful consideration, as it can negatively impact your credit and decrease your chances of successfully securing a loan in the future.