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A personal loan is one of the simplest lending products out there: you borrow money, usually to make a purchase, and pay it back with interest over an agreed period.

What’s less simple is how lenders work out who to approve for a personal loan - the process is hidden from view.

So, in this article, we’ll look at how lenders decide who to lend to, and how you can maximise your chances of getting approved for a loan. 

If you’re ready to apply for a loan, Koyo offers flexible personal loans of £1,500-12,000. You can take a look at our loan calculator or make an application at Representative APR 27%.

In this article, we’ll focus on unsecured loans, rather than secured loans, which generally require you to put your house as security and are therefore much riskier. And just so you know, this article is part of a series - if you want more information, take a look at our full guide to personal loans and our introductory article, what is a personal loan.

The second question is important, but most lenders can’t independently verify affordability information ( like Koyo can - we’ll cover that later). Unfortunately, that means that most lenders base their decision on what someone else says about you, rather than your present financial situation.

How do lenders decide who to lend to?

Before we think about how you can maximise your chances of getting a loan, it’s worth taking a look at how lenders decide whether to approve or reject a given application.

What lenders want

The key thing to remember is that lenders - whether that’s a high street bank or an independent loan provider - are businesses. In order to stay in business, they need to make money. The surest way to lose money is to write loans to customers who don’t repay the loan!

So, when writing a loan, a lender is usually trying to work out the likelihood that a customer will repay a given loan. No loan is 100% safe, but lenders try to charge enough interest so that even if a few borrowers default, the lender can still make enough money to stay in business.

It’s a delicate balancing act: charge too little and you’ll lose money, but charge too much and your loans won’t be competitive, meaning that you won’t have any customers to start with.

How do lenders know who will repay them?

In short, they don’t. No lender knows for sure who will pay them back in full. However, there are two questions they can ask to get an idea:

  1. Does this person have a track record of repaying debt?
  2. Does this borrower earn enough to comfortably afford repayments for this loan?

For most lenders, the first question is most important. So, many lenders will carry out a credit check, getting information from credit reference agencies (also known as credit bureaus - think Equifax, Experian and TransUnion). These companies keep track of individuals’ debt, and the timing of their repayments, among other things. 

The second question is important, but most lenders can’t independently verify affordability information (Open Banking lenders like Koyo can - we’ll cover that later). Unfortunately, that means that most lenders base their decision on what someone else says about you, rather than your present financial situation.

How the loan application process works

So in general, your job is to show lenders that you’re someone who can and will repay the loan you’re applying for. How do you do that? Read on!

How can I get approved for a personal loan?

Once you understand what lenders are looking for, it’s pretty straightforward to work out what you need to do in order to maximise your chance of getting approved for a loan. Here are our top recommendations:

Work on your credit score

For many lenders, your credit history - chiefly your track record of repaying debt - is the most important factor in determining your creditworthiness.

Lenders get your credit history from credit bureaus, and the surest way to improve your credit score (which is just a simplified reflection of your credit history) is to make sure you’re repaying any current debts you have on time.

There’s a little more to a credit score than that though, and small changes - for example making sure you’re on the electoral roll or fixing any mistakes that may appear on your file - can make a big difference. The Money Advice Service’s guide to improving your credit score is a great place to start.

Make sure your loan is affordable

The other side of the coin is affordability. When writing a loan, responsible lenders want to be sure that you’ll be able to comfortably repay it.

So if you have £300 per month left over after meeting your obligations (rent, food bills, petrol etc.), but monthly repayments would come to £280 per month, this might be a red flag for a lender. The lender would worry that you might not be able to meet your repayments - in particular, if you have a change in circumstances.

They may also consider your debt-to-income ratio, which is a slightly simpler way of looking at things since it doesn’t factor in what proportion of your income is tied up with monthly expenses.

It’s worth doing some homework yourself to work out what you think you can afford, leaving yourself a sensible buffer. While you can increase the loan term (i.e. pay it back over a longer period) in order to reduce your monthly payments, it’s important to bear in mind that you’ll repay more in total interest this way. Of course, reducing the loan amount is the easiest (and best) way to increase affordability.

Find a lender that offers loans based on affordability

The challenge when it comes to writing loans based on affordability is verification.

When a lender checks your credit history, that information comes from a very reliable source. Credit bureaus keep (usually) accurate, detailed records on things like missed payments, loans paid off in full, CCJs and the like.

But it’s much tougher for a lender to check affordability - that’s because most lenders can’t independently verify your income or monthly spending. This is where Open Banking lenders come in - using Open Banking technology, lenders such as Koyo are able to securely view your bank account information, and verify the affordability of a given loan for you.

As a result, Open Banking lenders are able to rely on affordability, placing less emphasis on a credit score, meaning you might be able to access a loan even if you’re a first-time borrower, or simply haven’t built up a strong credit score yet.

What’s the easiest loan to get approved for?

Before we answer this question, it’s important to highlight that the “easiest” loan is not necessarily the “best” loan.

In general, the easiest forms of credit to get approved for will be things like payday loans. This type of loan has very high rates of interest, and taking out a payday loan may make it hard for you to access other forms of credit in the future. 

Rather than asking yourself what the easiest loan to get approved for, you should ask yourself which is the best option for you. 

If you want to work out how likely you are for a given form of credit though, help is out there: you can use Money Saving Expert’s excellent eligibility calculator to get your approval chances before you apply.

How long does it take to get approved for a personal loan?

When it comes to loan applications, things have changed for the better over the last few decades. Rather than visiting your bank manager in person, filling out paper forms and waiting patiently for weeks, modern lenders can turn round loan applications 100% online - and very quickly.

Koyo, for example, usually gives a decision after one working day, with money in your account within 48 hours of your application. Many other lenders are quick, too, since much of the application process is automated.

For more information on what you’ll need if you want to apply for a loan, take a look at our guide to the key documents needed for a personal loan.

Related post: Considering a loan to cover a medical procedure? Our detailed guide covers everything you need to know about medical loans.

What credit score do you need to get a loan?

When making a loan decision, lenders don’t generally look at the credit score itself - this is just a representative number to make it easy for you to understand your credit history at a glance.

However, the number is a useful guide - each of the three bureaus (Experian, Equifax and TransUnion) categorises its scores on a scale from very bad to very good.

There’s no specific cut-off, but borrowers with a good credit score (which reflects a better credit history) will, in general, be able to:

  • Access a wider range of loans
  • Borrow larger amounts of money
  • Borrow at lower interest rates

In general, so long as your credit score is at least in the “fair” category, you should be able to access a reasonable range of loans, but your choice will be limited if your score is in the “poor” or “very poor” category. We’ve put together a guide to the best options available if you have a “fair” credit score.

Can you get approved for a loan with a bad credit score?

The short answer: yes, but it’s harder.

The slightly longer answer: every lender has slightly different criteria, based on what they think a “good” borrower looks like. One lender might be comfortable with you having a few credit cards, but might see a short address history as a huge red flag - and another lender might have completely the opposite view.

Because different loan companies look for different things, it may well still be possible for you to be approved for a loan even if you have a bad credit score, but you’ll probably have to work harder to find a provider that’s willing to accept you, and will almost certainly pay a higher rate of interest.

The silver lining is that the surest way to improve your credit score is to always make your loan repayments on time, so you’ll actually be building your credit score in the process. For more information on how this works, you can read our guide to how a personal loan affects your credit score.

The other option is to find a lender who uses Open Banking rather than basing their decision solely on your credit history. For example, Koyo offers flexible personal loans of up to £7,500 with a representative APR of 27%.

Related article: Thinking about your next car? Our guide on how to get a car loan with a bad credit is full of insider tips, covering car loans, HP, PCP and lesser-known alternatives.

What to do if your personal loan application is rejected

Firstly, don’t panic. There are lots of reasons for personal loan rejections, and many of them are easy to fix. 

If you do get rejected for a loan, we’d suggest you take a look at our full guide on the subject, but if you think you’ve been rejected because of your credit report, you could look at an Open Banking lender, such as Koyo. Koyo uses your bank data to offer better rates, rather than basing its decision solely on what credit bureaus say about you.

What next?

Hopefully, you’ve found this guide useful. If you have any questions, let us know in the comments section below. 

And if you’re ready to start applying for a loan, Koyo offers flexible personal loans of £1,500-12,000. You can take a look at our loan calculator or make an application at Representative APR 27%.

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