Personal Loan Approval Factors

If you need money, whether for a planned purchase or a surprise emergency expense, a personal loan is a great option. At People Driven Credit Union, we have many choices to consider. However, unlike a car loan or a mortgage, many people have never gone through the process of obtaining a personal loan. Below, you will find all the important information you need to ensure you check all the boxes for personal loan approval factors that a financial institution will be looking for. 

Personal Loan Approval Factors Lenders Look at When Reviewing Applications

When you are applying for your personal loan, there are a number of important pieces of information that your financial institution will need to look into as part of the process.

Purpose of the Loan 

The first step is to make sure your lender knows the purpose of your loan so they can find your best fit. For example, applying for an unsecured, quick-cash loan is not your best option if your goal is to make some home improvements; go for a secured home improvement loan instead. 

Applying for the type of loan that best suits your financial needs is critical in making sure your application has the highest likelihood of success.

Credit Score 

One of the most important factors a lender will consider when looking at your loan application is your credit score. Before you begin the application process, you will need to familiarize yourself with where you stand. 

If you are a PDCU member, there is a simple way to do just that: the MyPDCU Credit Score Simulator. Our members have instant access to their most recent credit score reports (without any hidden fees or requirements) directly in their MyPDCU Banking App. 

You can see a comprehensive breakdown of your credit history, including payment patterns, credit utilization, loan history, and credit inquiries. More than that, you can also create credit goals and receive real-time alerts for changes to your credit report. 

One of the standout features is the interactive Score Simulator Tool, which allows members to visualize how specific financial actions, such as paying off a credit card balance or applying for a loan, could impact their credit score. 

The better your credit score is, the better terms and rates you will get on your personal loan. However, while having bad credit will make getting favorable rates more difficult, it is not an insurmountable roadblock to successfully applying for a loan. 

At credit unions, a loan application will typically be more flexible than at a bank. Bad credit is typically defined as a FICO score under 580; but at PDCU, we look beyond a simple score and take the full financial picture into account, giving options for people with less-than-perfect credit. For example, if you provide proof of income (like pay stubs or a tax return), it could show that you are more prepared to take on a loan of a specific size than your credit score may indicate. 

While there are certain times in which you need money immediately, like unexpected car maintenance or medical bills, sometimes delaying your loan can be a big help in your approval process. Giving yourself time to pay off a prior debt or waiting until you get your coming raise at work could be just the boost you need to secure the personal loan you are looking for.

Debt-to-Income Ratio 

Another metric that lenders will take into consideration is your debt-to-income ratio. 

As a rule of thumb, your debt-to-income ratio should not exceed 50%, meaning your monthly debt payments should be less than half of your monthly income. To make sure your application has the best chance of succeeding, ensure your ratio is as good as possible by paying off credit card balances or prior loans, increasing income, or both.

If your debt-to-income ratio and/or your credit score are not where you want them to be prior to submitting your personal loan application, you could consider finding a co-signer. If the person you are co-signing with has a stronger credit history than you do, it will reduce the risk for the lender and allow you to negotiate for better terms. However, be aware that any issues in repaying the loan would also negatively impact your co-signer, so be sure to have an in-depth conversation before deciding to bring anyone into your loan application process. 

There are also several different types of personal loans that can aid your financial future and ensure your next loan application goes more smoothly. For example, with a debt consolidation loan, you can take multiple high-interest debts, bundle them together, and pay them all off at once, leaving you with a single lower APR* payment each month. 

Another option is to take out a credit builder loan, which is a smaller-sized loan that allows you to make regular, on-time payments to establish a positive credit history and improve your credit score, fostering better financial habits. 

Essential Documents 

Whenever you are applying for a loan, you will need to have a handful of necessary documents on hand. 

Make sure you have a valid photo ID (like a driver’s license or passport), proof of income (like a pay stub or recent tax return), employer information, and details on any current debts.

Double-Check for Mistakes

Once you have completed all of the prior steps, go back and make sure everything is correct. Any mistakes may slow the personal loan application process down. 

Examples of an obvious delay would be to not have the proper documentation for a loan application (as listed above), or to be unfamiliar with your credit score or any fixable errors in your credit history. An example of a less obvious issue would be making a drastic change to your financial situation in the midst of the application process, like changing jobs or making a large purchase. 

Another final step you can take before beginning your application is to take a look at the PDCU personal loan payment calculator. You can enter a loan amount, an annual percentage rate, and a payment timeline to see what your payments would look like with a given set of variables, and tinker with those figures until you can find the loan terms that best suit your needs. 

Once you are finally ready to apply for your personal loan, apply online or call our loan department at 248-263-4100. 

Frequently Asked Questions