With the COVID-19 pandemic, many people have either lost their jobs or had to take pay cuts. This has heavily impacted their standards of living and their eligibility for loans. To make it worse, banks are making the loan approval process even harder.
According to Finder, mortgage approvals from the Bank of England fell by 87%, from £73.5 million in February of 202to £9.3 million in May 2020.
Luckily, every lender has their criteria for loan approvals. And while they are strict, there are things you can do to improve your chances of approval on your next loan.
Know your credit score
Even when you’re not in the market for a Solution Loans, it’s recommended to have your credit score in good standing. We recommend checking your credit report at least once a year and before your loan application.
Credit reports are financial CVs. They contain financial information that helps lenders to confirm your identity and determine your loan eligibility. They are compiled by credit reference agencies and are constantly updated with information from lenders.
Unfortunately, lenders don’t always share the exact information with all the top credit reference agencies - TransUnion, Equifax, and Experian. Therefore, you’ll likely come across at least three slightly different versions of the credit report.
The regular checks will expose some mistakes that could reduce your chances of loan approval. You’d also spot fraudulent credit applications completed in your name. You can contest these errors with the credit reference agencies to restore accuracy.
Research ideal lenders
Even if your credit score isn’t the best, you might have your loan approved if you chose the right lender. Some lenders are more likely to lend smaller amounts to individuals rebuilding their credit scores.
Major banks will automatically decline applications from individuals with a credit score lower than 700. However, smaller financial institutions like Solution-Loans are willing to work with you.
After research, if you have more questions, you can reach out to individual lenders and discuss your financial situation.
Shopping for the right lender is easier when you pull credit reports beforehand. For instance, if your credit score is low, you can avoid hard credit inquiries by skipping lenders that work with high credit scores. This is crucial since hard credit inquiries can hurt your credit score.
Determine the Debt-to-Income Ratio
The debt-to-income ratio is the ratio of your debt over your total income. A high debt-to-income ratio implies your debt is way more than your income which often points to financial trouble and inability to repay the loan.
If a huge chunk of your income is spent on monthly debt repayments like car loans and mortgages, your loan might be rejected despite having a high credit score. Lenders need to know you can afford the loan before they approve it. As such, a high debt-to-income ratio is often a red flag.
Generally, if more than 40% of your monthly income is channeled towards debt repayment, your chances of loan approval are slim. Bear in mind that the ratio only factors in debt and not regular bills, including utilities.
To improve your chances of loan approval, you can either look for ways to increase your income or reduce the debt first.
Provide Collateral or a Cosigner
Unfortunately, building a new stream of income and paying off debt isn’t an overnight process. If you have a high debt-to-income ratio, you can add a cosigner or collateral to the application to make it more appealing.
The collateral should be something of value relative to the loan amount. For instance, if you want a small loan, you can put up a paid-off car as collateral. If you are new to loan products, lenders might be cautious with you. You can put them at ease by adding a cosigner with a good credit score, credit history, and a low debt-to-income ratio.
However, the cosigner/guarantor will be responsible for the loan if you default. As such, a guarantor should be someone you trust and can share your financial situation with.
Pay down existing debt
Often, the easiest way to improve credit scores is to pay down debt. This strategy works great with large credit card balances since high utilization rates can pull down your credit score.
Though paying down your debt can be a daunting process, some methods will help you pay it down faster and effectively. But even then, expect to make some sacrifices, including doing more home cooking instead of ordering in, finding inexpensive hobbies, and getting creative with gifts.
Don’t be too focused on paying the debt off completely. Having revolving debt shows you are financially responsible, provided you keep a low debt-to-income ratio. Focus on paying down delinquent debts first as they have they do the most damage to your credit score.
We live in a credit world, and loans are necessary for many people to make progress in life. By following the above guidelines, you can increase your chances of loan approval by improving your credit score, credit history and increasing your creditworthiness. The steps above also help to set you up for a life of financial stability.
With some planning, budgeting, frugality, and hard work, it’s not impossible to improve your credit score and position yourself for higher chances of loan approval.