When applying for a loan – whether it is a car loan, personal loan, or home loan – you’ll need to put your best foot forward. However, this can be a bit tricky, especially if you’re not aware of what exactly the lender is looking for.
Yes, your credit score can play a massive role in loan application approval, but it’s crucial to know that it isn’t the only deciding factor that banks and/or financial institutions consider. While there are no universal standards by which every lender appraises potential borrowers, there are five integral factors that you should be aware of.
#1: Credit Report & Score
This one shouldn’t come as a surprise – nearly all lenders including banks and financial institutions look at your credit report and score before deciding whether they want to lend to you or not. It can provide them an insight into how you manage borrowed money.
Keep in mind that poor credit history signifies a higher risk of default. This may scare off some lenders as there is a probability that you may not return what they’ve lent you.
Therefore, the higher your credit score, the better. Lenders usually do not reveal minimum credit scores, partially because they review the score in conjunction with the elements outlined below.
Note: If you’ve been rejected a loan based on a poor score, there are other avenues available, such as bad credit loan providers like Jacaranda Finance. Such platforms offer instant cash loans to borrowers who don’t have a high credit score as required by some lending institutions.
#2: Historical Income & Employment Data
It’s completely understandable that lenders will want to know that you’ll be able to repay what you borrow. And as such, they see whether you have consistent and sufficient income before approving your loan application. Income requirements differ based on the amount you borrow, but generally, if you are borrowing a big sum, lenders want to see a higher income to confidently know that you’ll be able to keep up with the payments.
Additionally, the lender will also evaluate your employment history. Hence, try to demonstrate steady employment. For those who are self-employed, they may find it harder to get a loan than those who have a steady employment history.
#3: Outstanding Debt
Large amounts of outstanding debt can be a concern for lenders. Nevertheless, the less outstanding debt you have, the higher your chances of loan approval. The idea is that if you have significant amounts of unpaid existing debt, the chances of paying back a new one will decrease. Please note that the value of “large” debts varies from person to person and are based on metrics such as the annual income, debt utilization rate, and so on.
#4: Repayment History
Remember, lenders want to get paid. Therefore, a prospective borrower’s record of making repayments on time is of high importance. When the credit score of a potential borrower is calculated, repayment history is an important factor. However, remember that a few blemishes on your repayment history will not stop borrowers from lending you money, however, they may charge you higher interest rates and approve small loan amounts only.
Missed payments, late payments, bankruptcy, and defaults, are all red flags to lending institutions, as is having an account referred to a debt collection agency for payment failure.
#5: New Accounts
Having an established history of credit can be favourable for your credit score and rating. However, opening a number of new credit card accounts in a short period of time isn’t. When you open multiple new credit accounts suddenly, potential lenders cannot help but think “What do you need so much credit for?”. Moreover, they may also question your capability to return the debt if you decide to max out all those accounts.
It’s important to keep in mind that there are other factors that lenders may consider when reviewing your loan application. These can include the loan term, your liquid assets, size of the down payment, and your collateral’s value. So, whether you are looking for a personal loan, car loan, or home loan, ensure that you have put some thought and effort into the above-mentioned factors prior to applying.
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