By Rebecca Pike, money expert at Finder
Credit scores and personal loans: What you need to know and how to improve your application
Credit scores are used by lenders to determine whether or not you’re a risky borrower. And for personal loans, it can help a lender determine your specific interest rate.
Low credit scores can be a sign that you’ve previously missed other loan repayments or that you simply haven’t proven your ability to repay credit in the past. So when lenders see this, they may end up offering you a higher interest rate.
This is why it’s important to get your credit score in check before you apply. It will mean you might get a much better interest rate so you’ll end up paying less over the life of the loan!
Lenders will look at more than just your credit score though.
Here are 5 things you need to consider for the best chance of getting your loan approved, as well as how to get your credit score in top shape.
Let’s get this one out of the way. As already mentioned, your credit score signals to a lender how much of a risky borrower you could be.
So, one way to put you in better stead before you apply for a personal loan is to make sure you have the best credit score you can get. This might not be much effort if you already have a high credit score, but if you’re on the lower end it could take some time to get on the right track.
The first thing to do is check your credit score to be clear on what position you’re in.
Looking at your credit report also gives you the opportunity to flag any errors, such as incorrect personal information or inaccurate missed payments or enquiries.
Once that’s done, you can begin to work on building up your credit score. Pay off any outstanding late payments or defaults, make regular payments to your existing debts, pay your bills on time, lower the limits on any credit cards and avoid applying for multiple credit products at once.
Before you think about applying for a loan, you need to make sure you’re eligible. Common criteria for personal loans includes requiring you to be over the age of 18 and an Australian citizen or permanent resident.
Lenders won’t provide credit to anyone that can’t afford to make the repayments. This usually means you’ll need to have a job with regular income, and the lender may have a minimum income requirement, too. For the application, you’ll need to prove your income through payslips and/or bank statements.
Your employment will also need to be regular and stable, which often means you can’t be on probation. You’ll likely have to provide an employment contract to prove your employment status. If you’re self-employed you can provide tax returns, bank statements and/or an accountant’s letter.
When taking out a personal loan you can choose between secured and unsecured. With a secured personal loan, you are putting an asset up against the loan which the lender can take as collateral if you default. This reduces the risk to the lender, which means you usually receive a lower rate along with more favourable lending criteria.
You can consider securing your loan against an item such as a vehicle or boat. But the type and age of asset accepted can vary depending on the lender, so make sure you do your research or talk to your lender.
Not only is this good advice to make sure you can manage your credit and don’t bite off more than you can chew, but it can help with approval too.
Lenders will have their own method of assessing the amount you can borrow, so in theory you shouldn’t be given more than you can afford. But it’s important to work that out for yourself as well.
The lower the limit you’re applying for, the more likely the lender is to approve it. Once you’ve proved yourself as a good borrower repaying the loan, you may be able to apply for further credit down the track.
If you can put money into your savings account regularly, this may also improve your chances of approval. It will show a lender that you are responsible with your money and can likely manage your loan repayments.
The types of transactions in your account can also have an impact. Lenders may look at your bank statements and decide you’re spending irresponsibly. Spending on gambling or Buy Now Pay Later (BNPL) may not be seen favourably.
Following these steps may be able to improve your chances of approval, but it can really vary from lender to lender. Make sure you’ve done your research to find the right personal loan for you and be clear on whether you’re eligible and able to meet repayments before you apply.
Once you have the loan, make sure you make your repayments on time and if you’re able, consider making additional repayments. Not only does this help you repay the loan faster, but you’ll prove your reliability to the lender which will improve your chances of being approved for further credit.
Rebecca Pike is Finder’s senior writer for money. She joined Finder after almost 4 years writing for business publications in the mortgage and finance industry, including 3 years as editor of Mortgage Professional Australia.