One of the most straightforward lending products available is a personal loan. The premise is super simple – you borrow money to enable you to complete a purchase and pay it back in the agreed timeframe with interest.
However, what’s a little more difficult to understand is how lenders decide to approve applicants for a personal loan, as this process isn’t widely shared.
Therefore, in this post, we explain exactly what lenders look for when considering personal loan applications and provide you with an insight into how to ensure you are approved for a loan.
And if you’re in a position to apply for a personal loan when you’re done reading, Koyo provides flexible loans of between £1,500 and £12,000. You can utilise our loan calculator or submit an application directly to www.koyoloans.com. Representative APR 27%.
In the content that follows, we focus specifically on unsecured loans (as opposed to secured), which are typically much riskier and require you to place your house as security for the loan. You should also be aware that this article is part of a series, so please feel free to check out our full guide to personal loans when you’re finished reading this piece.
Unfortunately, the majority of lenders are unable to independently verify affordability information, whereas Koyo can. This means that other lenders typically base their decision solely on information that is provided to them by a third party, as opposed to understanding your current financial situation.
How do lenders make a decision on applicants?
Before we consider different ways of maximising your success when it comes to applying for a loan, it’s important to first look at the criteria that lenders use to make their decisions.
What lenders want
The best way to look at lenders is to consider them as businesses first and foremost, whether they’re a high street bank or an independent loan provider. And to succeed in the world of business, they need to make money and turn a profit. As such, lenders know that they are guaranteed to lose money if they lend to clients who aren’t able to repay the loan!
Therefore, a lender will begin by ascertaining how likely a client is to repay a given loan. And while no loans come with zero risk attached, lenders will try their level best to cover all bases. The main way they do this is by charging sufficient interest so that if a handful of borrowers default on their payments, the lender is covered by those that continue to pay as per the terms of the arrangement.
But as you can imagine, it’s a precarious balancing act: if a lender charges too much, their loans won’t be competitive, and if they charge too little, they’re likely to lose money.
How do lenders know if someone is able to repay the loan?
Ultimately, lenders have no way of knowing for certain if someone will repay a loan. However, they can prepare themselves by asking two questions:
- Does this individual have a track record of debt repayment?
- Can this person afford the repayments through their current earnings?
The first question is typically the most important for the majority of lenders. This is why they usually carry out a credit check, which sees them access relevant information from credit agencies such as Experian and TransUnion. These agencies collate information regarding people’s debts, the timeliness of their repayments, as well as other data that lenders might find useful.
And while question number two is vital, the majority of lenders are unable to independently verify information relating to affordability (Koyo can, as we explain later). As a result, most lenders base their final decision about whether to lend money to you solely on the information provided by a third party, which doesn’t necessarily consider your current financial situation.
So, It’s your responsibility to convince lenders that you’re capable of paying back the loan that you’re applying for. How do you go about it? Let’s find out!
How do I get approved for a personal loan?
When you know what lenders are looking for, it’s relatively easy to set a plan in action to improve your chances of getting approved for a loan. Here are some of our top tips:
Improve your credit score
Typically, your credit history and your track record of repaying debt is the most important factor for most lenders when deciding whether to issue you with a loan.
Lenders can access your credit history from credit bureaus, and the best way to improve your credit score is simply to ensure you repay your current loans on time, all the time.
But your credit score is a little more complex than this. For instance, making sure you’re on the electoral roll and correcting any mistakes that are on your file can make a big difference to your credit rating.
Ensure you can afford the loan
Next, you need to think about the affordability of the loan you’re applying for. If a lender is going to give you money, they want to be confident that you will be able to pay it back.
For instance, if you’re remaining with £400 per month after covering your financial obligations (rent, food, utilities, etc.) and the monthly repayments on your loan would total £350, the lender is unlikely to sign off on it. Why? Because a small change in circumstances would mean that you would probably default on the loan.
Lenders can also take your debt-to-income ratio into consideration, which doesn’t take your monthly expenses into consideration.
Either way, it’s important to conduct some research into what you think you can afford before you apply for a loan, and you should leave yourself a reasonable buffer. And while you could technically extend the loan period, you will find that your interest payments will increase if you do so. As such, the best way to increase affordability is to reduce the loan amount.
Look for a lender that offers loans based on affordability.
Verification is one of the biggest challenges when it comes to writing loans based on affordability.
When a lender approaches a credit bureau, they are provided with accurate information from a trusted source. This is because the bureaus store data relating to missed payments, loans paid off, CCJs, and other aspects of your financial history.
But checking affordability is much more difficult for lenders. This is because the majority of lenders are unable to independently verify your monthly spending or income. But Open Banking lenders are different. Lenders like Koyo can securely check your bank account information and therefore verify the affordability of the suggested loan based on your current situation.
This means that Open Banking lenders are less constricted by credit score and instead can determine your loan approval based predominantly on affordability. This means that first-time borrowers – or those with insufficient credit scores – have much more chance of accessing a loan.
What type of loan is the easiest to get approved for?
We need to start this section with a caveat – the easiest loan might not necessarily be the best loan for you.
Typically, payday loans are the easiest types of credit you can get approved for. But such loans come with extremely high-interest rates, and it will make it more difficult for you to access other lines of credit in the future.
So, instead of asking what type of loan is the easiest to get, it’s better to ask yourself which is the best option available to you.
The good news is that help is available if you’re looking to work out how likely you are to be given a certain type of credit. You can use Money Saving Expert’s superb eligibility calculator to examine your approval chances before applying.
How much time does a personal loan approval take?
Fortunately, things have improved considerably in recent decades when it comes to loan applications. Instead of having to schedule an appointment to see your bank manager in person and waiting weeks to hear the results of your application, lenders in the present day can usually handle the whole process online and offer you an answer very quickly.
For instance, Koyo will usually give you a decision within one working day and typically deposit the money into your account within 48 hours of the application. And due to the fact that much of the application process is automated, many other lenders offer quick turnaround times, too.
Be sure to review our guide to the required documents needed for a personal loan, so you can start the application process armed with all the required information.
What should your credit score be if you want to get a loan?
You might be surprised to hear that lenders don’t necessarily look at the credit score itself when deciding to approve your loan. Your score is just a number that makes your credit history a little easier to understand at first glance.
That being said, each of the bureaus (Experian, TransUnion, and Equifax) scores your credit on a scale rating from very poor to very good, so the score given is a useful guide for lenders to use.
While there’s not usually a minimum credit score required to be approved for a loan, borrowers with good credit scores are more likely to:
- Select from a broader range of loans
- Borrow higher sums of money
- Be offered lower interest rates
Generally, providing that your credit score is at least ‘fair,’ you should be able to apply for a decent range of loans, but you will probably be restricted if your score is considered poor or very poor, as you might expect.
Is it possible to get a loan with a bad credit score?
Yes, you definitely can get a loan with a bad credit score, but your chances of approval are lower.
This is because each lender uses its own criteria and defines what they think a ‘good’ borrower looks like. For instance, one lender might be very happy to approve you if you have multiple credit cards but would see your short address history as a red flag. And just to confuse things, another lender might have the completely opposite opinion!
Therefore, because different things are important to different lenders, you might be approved for a loan even if your credit score is poor. But that being said, you will have to work harder to find a provider that will take a chance on you, and you will have to come to terms with the fact that you will have to pay a higher interest rate.
But the good news is that you can improve your credit score by always making your repayments on time and never defaulting on your current loans. You can check out our guide on how a personal loan affects your credit score to find out how this works in practice.
Alternatively, if you have a bad credit score, you could look for a lender that uses Open Banking instead of your credit history as a factor in approving you for a loan. For instance, Koyo offers personal loans that are flexible, up to the value of £7,500, with a representative APR of 27%.
What should you do if your application for a personal loan is rejected?
First and foremost, don’t be too concerned. There are so many reasons why your personal loan has been rejected, and the majority of them are pretty easy to fix.
So, if your loan application is rejected, our first piece of advice is to dive into our comprehensive guide on the subject. But if you’re convinced that your application was rejected because of your credit history, consider applying for a loan from an Open Banking lender like Koyo. As mentioned, Koyo uses your real-time bank data to consider your application, as opposed to what the credit bureaus say about your suitability.
We hope that you’ve found this guide insightful and beneficial. You can let us know if you have any questions in the comments section below.
But if you’re ready to apply for a personal loan, remember that Koyo offers flexible personal loans of between £1,500 and £12,000. Representative APR 27%.