When applying for a loan, there are many factors lenders consider before deciding to approve such a loan. You want to do your best when applying for a mortgage, car loan, or personal loan, but it can be difficult if you’re not sure what your lender is looking for. You may be aware that they usually check your creditworthiness, but that’s not the only factor that banks and other financial institutions take into account when deciding to work with you. Here are seven to consider.
- Your Balance
Almost all lenders review and report your credit score because it gives them an idea of how you are handling the money you borrow. A bad credit rating indicates a higher risk of default. This deters many lenders due to the possibility that they will not get back what they loaned you.
Scores range from 300 to 850 with the two most popular credit scoring models:
- The FICO® Score
- The Vantage Score
The higher your score, the better. Lenders generally don’t provide minimum credit scores, in part because they consider your score as well as other factors. However, if you want to give yourself the best chance of success, aim for a score in the range of 700 or 800.
- Your Income and Career
Lenders want to know if you can repay what you’ve borrowed, so they need to make sure you have an adequate and stable income. Income requirements vary depending on how much you borrow, but generally, as you borrow more money, lenders need to earn more income to make sure you can keep up with your payments.
You must also be able to demonstrate that you have a permanent position. Those who work only part of the year, or freelancers just starting, may have a harder time getting a loan than those who work all year for an established business.
- Your Debt-To-Income Ratio
The debt-to-income ratio is closely related to your income. This analyzes your monthly debts as a percentage of your monthly income. Lenders like to see a low debt-to-income ratio, and if your ratio is over 43% (your debt payments don’t exceed 43% of your income), most mortgage lenders won’t accept it.
You can still get a loan with a higher debt-to-income ratio if your income is reasonably high and your creditworthiness is good, but some lenders will reject you rather than take the risk. Before applying for a mortgage, work to pay off your existing debt, if you have any, and reduce your debt-to-equity ratio to less than 43%.
- Value of Your Collateral
Collateral is something you credit to the bank when you cannot meet your loan repayments. A secured loan is a loan that involves collateral while unsecured loans do not require collateral. Secured loans generally have lower interest rates than unsecured loans because the bank has a way of getting its money back if you don’t pay.
How much you can borrow is also dependent in part on the value of your collateral. For example, if you are using your home as collateral, cannot borrow more than the current value of the house. That’s because the bank needs the assurance that if you can’t keep up with your payments, they’ll get all their money back.
- The Amount of The Deposit
Some loans require a down payment, and the amount of your down payment determines how much you need to borrow. For example, if you are buying a car, paying more upfront means you will have to borrow less money from the bank. In some cases, you can get a loan with little or no down payment, but be aware that if you go this route, you’ll pay more interest over the life of the loan.
- Liquid Asset
Lenders like to see that you have money in a savings or money market account, or assets that you can easily convert to cash, in addition to the money you use for a down payment. This ensures that even with temporary setbacks like losing your job, you can still make your payments until you recover. If you don’t have a lot of money saved, you may have to pay a higher interest rate.
- Duration of The Loan
Your financial situation may not change much for a year or two, but for 10 years or more, your situation may change a lot. When such change is not favorable, it can affect your ability to repay your loan. Lenders will generally be more comfortable lending you money for a shorter period, as you will likely be able to repay the loan sooner. Because you will pay interest for a few years on short-term loans, you tend to save more money. However, you have a higher monthly payment that you must take into account when deciding which loan term is right for you.
Understanding the factors that lenders consider when evaluating loan applications can increase your chances of success. If you think any of the above factors might affect your chances of getting approved, take steps to improve them before you apply. Reb0und can help you improve your chance of getting approved for any loan. We have experts that will look into your finances and provide the best advice on how to improve whichever aspect you’re lagging behind. Contact us today to get your next loan application approved immediately. Call us on 800 852 5049, send us an email on contact@reboundfromdebt.com, or fill a contact form here with www.reboundfromdebt.com/schedule-a-call/
