Several factors impact whether you’ll be successful in securing a bank loan. The bank considers things like your financial history and looks at your employment status and bill payments. Being knowledgeable and prepared is critical for success in getting approved for a loan.
So how can you prepare? Here are the best financial tips you should implement when applying for a loan.
Check Your Credit in Advance
The first step in preparing to take a loan is checking your credit score. With modern banking technology, it’s easy to access this information via most online banking apps. A rating of 670 and above is considered a good credit score. 740 and over is considered very good, and anything above 800 is considered excellent. The average credit score in the USA is 698.
If you discover that your credit score is under 670, you should pull a full credit report and see what’s impacting your score. Negative items include late payments, missed payments, a poor debt ratio, collections, bankruptcy, and hard inquiries.
Take Time to Improve Your Credit Score
Taking the time to improve your credit score is worthwhile, even if your existing credit is good. The better your score, the better your access to improved terms and interest rates you’ll receive. If your score is under 670, you’re likely to have stricter terms or higher interest, which will cost you more in the long run.
Start by reviewing your credit report and determining if there are any fraudulent or outdated items to be removed. You can draft a letter to remove inquiries from credit report records when your report shows inaccurate information. It’s also worthwhile to explore your financial management habits and pitfalls to determine how you can improve going forward. For example, if you make late payments or miss payments, setting an automated withdrawal on payday can help prevent that issue. If you struggle to budget and manage your finances, schedule a meeting with a financial advisor.
Calculate Your Needs and Payments
Take the time to calculate how much money you need to borrow based on clearly defined goals. Do some research and calculate different scenarios and how those will affect your monthly payments.
The bank offering the loan will want to know why you need it and whether you’ve done the work to clarify the amount. It’s essential to explore different scenarios, as fluctuations in interest rates can impact your monthly payments.
This exercise is also essential for setting boundaries as a borrower. It’s important to take only what you need, even if you’re approved for more.
Collect Other Financial Information
Be prepared when you sit down to do your application or have a conversation with a lender. In addition to checking your credit report, they’ll also want other financial data, such as:
- recent paystubs
- a letter from your employer
- information about collateral
- recent tax returns
- government-issued ID
- proof of address
Depending on the bank and the circumstances, they might not request all this information. However, showing that you’re prepared will boost the lender’s confidence when applying for a loan.
Shop Around for Credible Lenders
Don’t make the mistake of sticking with the status quo. While finding a reputable lender is important, look outside your current banking provider and explore other options as well. You might even get a discounted interest rate for transferring your finances to the new bank.
If you have good credit, shopping around is an effective way to get the best possible deal on your terms and interest rates. If you have poor credit, it’s still important to shop around to find the lowest interest rate available.
Consider Consolidating Existing Debts
One of the red flags for many banks is having multiple debt streams. If you have several credit cards carrying a balance, a line of credit, and a mortgage, the bank will have concerns. The logic is that if you experience financial trouble, will you be able to pay back all these lenders?
If getting a loan is in your future, try to consolidate your existing debts. Work with a debt consolidator to navigate this process.
Limit Your Applications
Shopping around for a lender is a smart decision. Applying to each bank you find is not. As mentioned above, hard inquiries are a negative item on your credit report. These are listed when you apply for a loan, showing your need to rely on credit. Every time you apply, your credit score will come down slightly.
Instead, look for preapproval calculators to get a better idea of your options and only apply to the best choice.
With these practical tips, you can improve your chances of getting approved for a bank loan and successfully paying it back.