Main Factors That Lenders Use to Determine Your Loan

ElitePersonalFinance
Last Update: February 1, 2021 Credit Report Loans

When applying for a loan, lenders have to determine their clients’ ability and solvency. The question might be hard since every individual determines the worthiness differently. Lenders may reject the client’s offer, while others might accept but placing some rules of adding different interest rates and credit limits on their loan.

Have you ever applied for a loan? Was your offer accepted? If yes, what requirements did your creditor considered while determining your qualification? But if not, would you like to know where you missed your target? Anyway, do not worry since this content will provide the lenders’ main factors to evaluate their clients’ creditworthiness.

Credit Score

A credit score is a rating used by financial institutions to determine whether the credit should be approved by an applicant or not. It shows the person’s capability and the level of paying the debt. Lenders such as credit card companies and banks establish the credit scores to determine who qualifies for a loan. Also, they evaluate the risk. Remember, every credit scoring has no limits to lenders. However, potential consumers need to know the following about the credit scores.

  • Consumers should understand the importance of credit and regularly check it. Remember, when applying for a credit card or a loan, lenders have to check the clients’ score, but this should not negatively impact them since their approval is not permanent.
  • Consumers need to differentiate between a credit report and a credit score. Credit reports contain information about your loans, debit balances, payment history, filed criminal cases, any bankruptcy report, work, and living station. However, your credit score is determined by your credit reports.
  • Potential consumers should have more than one credit score, FICO being one of the significant having the most credit scoring model. Would you like to know your credit score? If yes, it’s easy and cheap since the three major credit report agencies (TransUnion, Equifax, and Experian) provides free-scoring reports entitled to a free copy of your annual credit report.
  • Remember to compare your exact credit score with that of average. By doing this, you will determine whether your credit is improving.
  • In case you have no credit card or have poor credit, you can still secure a loan by using an alternative lender to register for a card or improve your card.
  • It’s advisable to regularly evaluate your credit score to avoid fraud and theft cases. These cases usually arise if someone has a massive debt bill or takes ones’ credit by his/her name. The best thing is that your credit card will help you know the act.
  • Also, consumers should be aware that massive credit card balances can cost them the whole of their lifetime.
  • Finally, should avoid joint accounts since they affect consumer’s credit score.

Debt-to-Income Ratio (DTI)

Debt-to-income is a ratio used by lenders to measure their client’s ability to manage their monthly payments and repay their debt balances. Do you have difficulties in calculating your DTI? DTI gets calculated by dividing all the monthly credit debts (credit card payments) by gross monthly income. The monthly credit card debts include car loans, investment loans, payday loans, and other debts. For instance, if the gross monthly income is $9,000, your debt costs $4,000 per month, your debt-to-income ratio will be $4,000/$9,000 or 44%. Remember, borrowers with larger debt-to-income ratios are more entitled to trouble adding monthly payments. However, you can lower your debt-to-income ratio by following the below steps.

  • Add extra monthly payments on your credit card debts.
  • Reduce the credit card expenses by first clearing all the credit debts. The costs get analyzed by avoiding applying for new loans.
  • Consider making large cash purchases rather than using the credit card for the same. Spending less on credit cards lowers your debt-to-income ratio.
  • Keep your monthly debt-to-income ratio updated to determine your progress. To lower the DTI ratio, you have to recalculate it continuously.

Credit History

Credit history is a record taken by lenders to show the borrower’s capability to repay the debts. Through your credit history, you will be able to identify your payment history, the type of loan you have, and the account duration since the time opened. However, lenders consider essential things on customer’s credit history.

  • Few or no late payments. If you have difficulties in settling bills on time, this means the chances of digging into trouble are high, and the more your credit history gets recorded. A late payment estimates one to get a loan until the settlements get cleared.
  • Older accounts. The majority of workers prefer customers with a lot of credit history order than five years. The reason is the capability of settling debts.
  • Remember, any purchases you make are subjected to the credit limit. If you have a revolving debt (also Line of Credit (LOC)) and installment loans, this means it’s easy to acquire a credit card, and you can handle different varieties of credit. Remember, any purchases you make are subjected to the credit limit.
  • No charge offs or collection accounts. Collections might arise from unsecured reports, including credit cards and personal loans. If an account is sold to a collection agent, the group can appear fraudulent accounts, negatively impacting your credit scores.

Capital

Capital is the personal investment in a consumer’s business that can get lost if the market fails. Most lenders consider a significant amount the borrower makes on financial investments, such as using personal capital (through loan application) to start your business. Remember, the higher the borrowers’ contribution, the lower the risk of defaulting on your loan. Interestingly, the savings, investments, and other consumers’ assets have been essential in our lives since they can help repay the loan debts.

Credit Utilization Ratio

Credit utilization is the ratio of your credit card balances the consumer use. Remember, the higher the debt, the higher the interest rates. To get proper credit utilization, you have to keep your credit balances below 30% of the credit limit. For example, if you have $1,200 in your credit card with $100 as a balance, your credit utilization ratio is 12%, which is typically low. The ratio is low because anything under 20% is considered a good credit utilization percentage or ratio.

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