How to know if I’m eligible for a personal loan?

The days of the “how much can I borrow” personal loan are well and truly over; these days you need to prove you’re a safe bet for creditors. 

When you’re preparing to apply for a personal loan, you need to make sure that you have a good chance of being approved. You also need to make sure you’ve found the right product for you and your individual circumstances.

Whether it’s a secured or unsecured personal loan, and no matter how much or how little the amount is, you’ll have to fulfil some eligibility criteria in order for your application to be processed.

Most lenders in Australia have five main factors that they look at to establish your eligibility for a loan. While each lender has its own processes and exact criteria, there are requirements that they all have in common. It’s important to know, understand and (most importantly) meet these minimum requirements before you start your application.

If you know that you don’t quite meet one or more criteria, then you shouldn’t proceed with your application because every inquiry for new credit leaves a note on your credit report. A rejected inquiry is, as you might imagine, damaging to your credit score.

While the various loan providers have different specialisations—some offer personal loans for bad credit, for example—most lenders will want to know that you’re up to scratch in the following five areas before they agree to give you a loan. 

It pays to read a few car or home loan guides to get a good idea of what you’re dealing with too.

Your income

Almost all of Australia’s lenders need you to have a steady income so that you can keep up with (at least) the minimum payments you’ll have to make each month to pay back the loan and its interest. Some lenders will consider you even if you’re on a low income (although you may only be eligible for smaller loans), while others ask for a minimum annual income before you can apply.

Your employment

There’s no discrimination against any job sector (as long as it’s legal, of course), but many lenders prefer you to be in full-time employment. You can still find loans even if you’re a part-time worker or you’re self–employed, but there may be fewer options, with smaller limits or other extra conditions.

Some lenders will approve you for a loan even if you’re unemployed and receiving government benefits. However, you’ll probably only qualify for smaller amounts as you have to show that you can service the loan on the income that you have.

Your credit history

If your credit history is very good or excellent, with no negative listings like defaults, late payments, or ancient overdrafts that never seem to diminish, then you’ll look like a good prospect to lenders. Your credit score is a measure of how much risk the lender is taking to give you the loan and lenders don’t like risks. If you’ve always paid bills on time, repaid previous loans off promptly and maintained a steady job, then you’ll be more likely to be approved for a loan than someone with a rash of missed payments.

Your loan security

The big difference between an unsecured and a secured personal loan is the security. That’s not a play on words; the security is the assets that you can back the loan with. Good examples of secured loans include car loans and mortgages. The car or your house is collateral in the event of you defaulting, so the lender feels safer when it comes to approving your loan application. An unsecured loan has no collateral involved, so the lender needs to use your credit score as the main factor when making a decision.

Your assets, expenses and debts

You’ll have to list your assets, expenses and existing debts when you make your application. This is because lenders use your income and outgoings (including debts) when they look at your debt–to–income ratio, or DTI. Having more income may raise your credit rating as long as you’re not ploughing it all into repaying credit cards, overdrafts or a huge mortgage. It’s about how much your disposable income is and how you handle it, not just about rocking up to the bank and asking “How much can I borrow?”

Your expenses are most often estimated and while you might be a few dollars out, lenders can look at how much you’re spending on kindergarten fees and groceries and weigh it up against the averages from other borrowers. Never be tempted to massage figures.

Your job title may be more significant than you imagine

When you fill out your employment details, you’ll be asked to list your job title. Lenders want to know this because they’ll have a good idea of the salary ranges for people in your profession with your length of experience. They’ll cross-reference your job title with your salary to eliminate fraudulent applications.

Lenders also assign a risk measurement to each profession. Some “jobs” are more likely to default than others. This means that even if you do qualify for your loan, you may get a slightly higher interest rate than your friend, even though you earn similar salaries.

Build a relationship with the lender

If you open a chequing account with the lender you like the look of most, then you’ll be able to show how you handle money, then you can ask “How much can I borrow home loan provider?” It’s a good idea, especially if you know you don’t need the loan immediately. Just having a history with a bank or lender can help you to get loans in the future. Just make sure you behave yourself!

Improve your Debt to Income ratio (DTI)

Lenders like DTIs of 40 per cent or lower, so you can either earn more or reduce the balances on existing debts. Or both…

Be in steady employment

You may be viewed as riskier if you’re still in your three-month probationary period at your new job, even if you’re acing it every day. Another issue may be earning different amounts each month, especially if the “bad” months mean less than minimum wage and you have to use savings from the “good” months.

You simply can’t guarantee that your loan application will be approved, no matter how good your circumstances are, so make sure that you’re optimising your chances and approaching your most appropriate lenders.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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