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Dan O'Sullivan

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Applying for a personal loan can be a daunting process. Whether you’ve been planning on repaving the patio, or have your eye on a new set of wheels, calculating the cost may seem impossible. But there are a few things you can do to make the loan application process a breeze, and ensure you’re getting approved for the best deal possible.

What is a personal loan?

A personal loan is an amount of money borrowed from a bank or other financial institution. The initial loan amount borrowed is known as the principal amount. In addition, interest and/or fees are added onto the principal amount and paid with your regular loan repayments.

Personal loans can allow you to make big purchases that otherwise would not be possible. Sometimes, a personal loan can come with lower interest rates than credit cards. This means it could be easier to pay them off over a pre-approved period of time, which is called a loan term. Often, personal loans are also secured, meaning you have to offer up collateral to ‘secure’ the loan.

In most instances, personal loans for amounts less than $2,500 are unsecured loans. If the loan amount is more than $2,500, it will often be a secured loan. Meaning, you will be asked to provide an asset as security on the loan.

Most personal loans will have a fixed interest rate or fee structure. This means that repayment amounts will be the same over the course of the term. Some loans allow for variable interest rates, which can allow for greater flexibility when making payments. Fixed rates have the added benefit of security, but sometimes the flexibility of variable rates can better suit your financial situation.

What can I use a personal loan for?

Personal loans are great for their broad usability. Usually, you can use a personal loan for any large personal expense you cannot reasonably manage without financial assistance. This makes personal loans handy for unexpected bills, home renovations, urgent car repairs, or even a holiday.

Personal loans also have the added benefit of allowing you to merge your credit card or loan debts. Known as a debt consolidation loan, a personal loan can help reduce the stress of managing multiple credit card or other loan repayments. Instead of having to make several payments, consolidation loans can organise your debts into one amount to pay off over the term.

5 tips to increase your chances of personal loan approval

If you’re a first-time personal loan applicant, or just want some extra assurance that your application will be approved, we have put together five important tips to increase the chances of getting approved. While there is never a guarantee that a personal loan application will be approved, there are certainly things you can do to give yourself the best chance possible.

1. Make sure you meet the eligibility criteria

To approve an application, the lender must ensure the applicant meets their eligibility criteria. Each lender, bank, or other financial institution, will have their own eligibility criteria. For example, to qualify for a personal loan with Jacaranda, you need to meet the following lending criteria:

  • Be over 18 years of age;
  • Be an Australian citizen or permanent resident;
  • Have received a regular income (for the last 90-days);
  • Have internet banking set up;
  • Hold a direct contact number and email address.

Check the lender’s eligibility criteria before you apply with them. If you don’t meet their criteria, they most likely won’t be able to approve your application.

2. Check your credit rating

A credit score is a numerical indicator of your reliability when borrowing money. Generally, the higher your credit score, the more reliable you are seen in the eyes of creditors. Potential lenders will often perform a credit check on you to look at your credit history before approving your loan application.

When it comes to applying for personal loans, it might be a good idea to ensure there are no mistakes or inaccuracies in your credit report. By making sure there are no unnecessary defaults or late payments, your credit score will be as good as possible, which can increase your chances of getting approved for a personal loan.

To keep your credit score intact, be sure to make loan payments on time, try not to exceed credit limits, and manage credit products responsibly. Applying for too many loans in a short period of time can also be an indicator of financial distress. Because of this, it can have a negative impact on your credit score and reduce your chances of being approved for a loan.

3. Cash flow

When applying for a personal loan, potential lenders need to see that you have some form of consistent income. This demonstrates that you have the ability to meet your repayment obligations. Responsible lenders will not approve a loan that is not within your means, so demonstrating sufficient cash flow is key for loan approval.

Credit card limits are also monitored as part of your cash flow, so make sure that you aren’t overspending. Consistency is key when it comes to your cash flow. If your spending habits are constantly exceeding your monthly income, it shows you aren’t reliable at meeting loan repayments. This leads onto the next tip: budgeting.

4. Budget and savings

If you’re applying for a loan through a bank, it pays to have a good account history with them. This might include having a second savings account that you contribute to. Potential lenders will appreciate your ability to budget well, which serves as further assurance that their loan will be repaid. For example, if something happened to your primary source of income, they know you would likely still be able to make loan repayments.

The ability to budget also shows you know how to prioritise where your money goes. If you are sticking to your budget every month, then you should be able to deal with the added costs of loan repayments.

5. Ask for what you need

Like with credit card limits, it’s important not to bite off more than you can chew with personal loans. Figure out what you need the loan for and attach a monetary value to that. Then, apply for a personal loan of that amount; no more, no less. If you apply for a loan less than the cost of what you’re trying to buy, you might have to dip further into your savings. If you apply for a loan greater than necessary, you might not be able to pay it off over the course of the term. Potential lenders are more likely to grant loans if they can see where their money is going to go.

Written by: Dan O'Sullivan