Deciding when to take out a loan depends on various factors, such as your personal finances, current economic conditions, and interest rates. There may not be an ideal time for everyone to take out a loan, but evaluating these factors can help determine if it’s financially sensible for you to get a personal loan.

When to get a personal loan

If you’re considering a personal loan, it’s important to know that not all consumers are financially suited for it, especially in the current economic climate with high-interest rates. Lenders look at factors like your credit score, credit history, and annual income when considering your eligibility for a loan. If you meet the requirements and fall into certain financial categories, a personal loan could be a suitable option for financing your next purchase, project, or life event.

You have a very good credit score or above

Most lenders use the FICO credit model for scoring, where a score above 740 is considered very good. Although some lenders may accept a lower score, getting approved may be difficult currently, and if you do get approval, you may receive a high-interest rate.

You have an established repayment history

Due to increased risk aversion among lenders, having a long track record of positive loan and credit repayment is now more important than ever. Your credit report documents all payments you’ve made and any missed or late payments for up to seven years. If you have a limited or unstable credit history, there is a higher likelihood that your loan application will be rejected by lenders currently.

You have a low debt-to-income ratio

To clarify, your debt-to-income (DTI) ratio is the amount of your monthly debt payments divided by your gross monthly income expressed as a percentage. Lenders may view a higher DTI as a possible risk of default, so some lenders or banks require a DTI below a specific percentage. If your DTI is below 36 percent, then you might want to think about getting a personal loan.

Your annual income is steady and sufficient

Different institutions may have different minimum income requirements for approval, but not all lenders have a set amount requirement. Generally, a higher income increases the likelihood of approval. Many lenders accept multiple streams of income as long as the necessary supporting documents are provided.

You prequalified for competitive rates

You can use prequalification to check your expected interest rates and chances for approval from various lenders before you apply. Prequalification won’t affect your credit score and makes comparing lenders easy. If you receive the lowest or highly competitive interest rates, it may be a good idea to consider that offer.

When to not take out a personal loan

Although borrowing is not completely discouraged due to the rate hikes, it is recommended that borrowers carefully evaluate their financial situation and explore other loan options before committing to potentially expensive monthly payments. If your financial health is uncertain or unstable, this may not be the ideal time to consider taking out a personal loan.

• Most lenders have set minimum financial requirements that you do not meet.
• The lenders that you are eligible for have high-interest rates.
• When you prequalify, you may be offered extremely high-interest rates or denied approval altogether.
• Your monthly budget has very little flexibility.
• Although your credit history is thin or short due to your young age, your score is still high.
• You do not have a co-signer with good enough credit to increase your chances of approval or decrease the interest rates.
• It appears that your income is irregular or that you are presently not working.

Why it may be difficult to get approved for a loan right now

To make an informed decision about your finances, it’s essential to first understand how inflation is impacting the consumer lending market and how this may affect borrowers. Only then can you properly consider your approval odds and potential interest rates.

Federal Reserve hikes rates 10 consecutive times, likely leading to default

In an effort to curb inflation, the Federal Reserve increased interest rates in both 2022 and 2023 at a notably rapid rate. The average personal interest rate as of June 21, 2023, stands at 11.06%, with the average rate in 2021 being 9.38% for reference.

The default rate for unsecured personal loans is predicted to increase from 4.10% to 4.30% in 2023 due to higher borrowing costs and the possibility of a recession. Therefore, even if you are approved for a loan now, it is likely that you will be charged a higher interest rate than if you wait for the Federal Reserve to decrease rates.

Banks and lenders tighten approval requirements

A recent Federal Reserve report states that banks and online lenders have reduced the number of loan approvals due to the unstable economic climate. The projected decline also influences this decision in the credit quality of their current loan portfolios.

Borrowers should be aware that loans are going to be more expensive than they were in the past few years. Additionally, lenders are likely to tighten their approval requirements to avoid risk, which means that not everyone will be eligible to borrow.