Overview
Whether you want to buy a house or car, cover a home renovation, pay for a wedding, or anything in between, a loan can help you meet your goals. Before you apply for one, however, it’s a good idea to familiarize yourself with what lenders will assess when they review your application. This way, you can strengthen your borrower profile and increase your chances of approval with a competitive rate and favorable terms.
Key Takeaways
While good credit can help you get approved for a loan with a low rate, it’s not always necessary.
Many lenders look beyond your credit and focus on other factors like your income, debts, and collateral.
Lenders want to feel confident that you’ll be able to repay your loan according to your agreed-upon repayment schedule.
7 Factors Lenders Consider When Reviewing Your Loan Application
As you shop around for a loan, you’ll notice that each lender has their own unique qualification requirements. However, most lenders take the following factors into account when they assess your application.
1. Credit score
Your credit score shows your creditworthiness or how likely you are to pay back what you borrow. The higher your score, the easier it will be to lock in a loan with a competitive rate and term. While some lenders are more flexible than others, many of them look for a minimum credit score of 620.
2. Employment history and income
Lenders want to see that you’ll have the money to repay your loan. As a result, they’ll usually ask for your employment history and proof of income, often in the form of pay stubs or tax returns. Note that even if you don’t have a traditional job, a steady income stream from other sources like side gigs, part-time work, Social Security payments, or retirement plan withdrawals can help you get approved.
3. Education
Some lenders prefer to extend loan offers to borrowers who have earned an undergraduate, graduate, or doctoral degree. They believe this indicates steady employment or a higher income, which can enable you to borrow more responsibly.
4. Debt-to-income ratio
Your debt-to-income ratio reveals how much credit you’re using compared to how much is available to you. Lenders typically look for a ratio of no more than 43% because it can reassure them that you have money left over in your budget to make another loan payment. Fortunately, some lenders are more lenient and accept borrowers with debt-to-income ratios of up to 50%.
5. Collateral
If you take out a secured loan, such as a mortgage or auto loan, collateral will be important. You’ll need to put your house, car, savings account, or other asset on the line so that lenders have a way to recoup their losses in the event you default on your loan. Note that collateral is only required for secured loans, so if you take out an unsecured loan like a personal loan or credit card, this factor won’t matter.
6. Joint borrowers or co-signers
Some lenders accept joint borrowers or co-signers who can help you qualify for a loan you might not be able to get on your own. Your joint borrower or co-signer may be a trustworthy friend or family member with strong credit and stable income who applies with you. While a joint borrower is equally responsible for paying back the loan, a co-signer will only be on the hook if you don’t make your payments.
7. Loan amount and purpose
Each lender has their own loan amounts and use restrictions for the different types of loans they offer. If you’re interested in a personal loan, for example, you might be able to borrow up to $50,000 or, in some cases, $100,000 and use the funds to cover virtually any expense. Mortgages and car loans, on the other hand, come with higher borrowing amounts but are only intended for house and car purchases.
Explore All Your Options
Fortunately, there is no shortage of lenders on the market. If you take the time to shop around and compare multiple loan offers, you’ll be more likely to secure a loan with a competitive rate and terms that meet your unique lifestyle and personal preferences.
Depending on your situation, it might make sense to wait before applying for a loan. With some time, you can improve your credit, lower your debt levels, and land the stable employment you need to receive a more attractive offer.
by your friends at The Daily Navigator
