How do credit scores affect your personal loan application?

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Personal loans can be a useful financial tool, but it’s important to understand your eligibility before you consider applying.

Whether you’re looking for a personal loan to help finance home renovations, a rooftop solar installation, or a family vacation, you’ll need to meet certain criteria to get approved.

Eligibility criteria tend to differ from lender to lender, but generally require the applicant to be:

  • 18 or older
  • An Australian citizen or permanent resident
  • Employed and/or receiving a regular income
  • A responsible borrower as indicated by credit score

While each of these criteria will impact your personal loan application approval, your credit score will also affect the interest rate you may be offered.

The reason for this is that lenders tend to reserve their most competitive interest rates for their excellent borrowers, due to the reduced level of risk they bring with them.

Borrowers with good to excellent credit ratings generally exhibit responsible credit behavior, such as consistently paying off debts in a timely manner. In contrast, borrowers with poor credit ratings will often have late payments or defaults recorded on their record, demonstrating to lenders that they may pose a higher level of risk as a borrower.

To balance this risk, lenders may approve an application from a borrower with poor credit but at a higher interest rate. Or they may ultimately decide the risk isn’t worth it and decline the request. There are a number of contributing factors that will lead them to their decision.

If you’re unsure of your credit score, consider visiting RateCity’s Credit Score Center to check it for free.

How can I strengthen my candidacy?

If you find that your credit score is not as high as you hoped, you may be wondering what your options are to improve your chances of being approved for your preferred personal loan product.

Working on improving your credit score can not only help strengthen your personal loan application, but also your overall financial health.

However, raising your credit score can take some time, and you may not have the luxury of waiting for it to rise before applying for a loan. In this case, you might consider strengthening your application in other ways to increase your chances of approval while continuing to improve your score.

  • Consider a joint personal loan – Applying for a personal loan with your partner as a co-borrower could help strengthen your case. This is because the lender will assess the income, credit scores and other factors of both applicants, with the responsibility being shared by both of you.
  • Opt for a secured loan – You may choose to secure your personal loan against an existing asset, such as a home or vehicle, to reduce the risk to the lender and potentially lower the interest rate offered to you. Keep in mind, however, that you risk losing your property if you do not repay the loan.
  • Do your due diligence – Comparing your options and checking the fine print is a simple way to improve your chances of being approved for a competitive loan. Consider using RateCity’s personal loan comparison charts to see what products may be available to you, and consider contacting the lender directly or clicking through to their website to get any questions answered.
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