Main Factors That Lenders Use to Determine Your Loan

Last Update: March 6, 2020 Credit Report Loans

When applying for a loan, lenders have to determine the ability and the solvency of their clients. 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 main factors the lenders consider 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 to an applicant or not. It shows the persons 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 which might rise by lending a significant amount to consumers and the counted loss in case there is bad debt. Remember, every credit scoring has no limits to lenders. However, it’s essential for potential consumers to know the following about the credit scores.

  • Consumers should understand the importance of credit score and ensure that they regularly check on it. Remember, when applying for a credit card or a loan, lenders have to check the clients’ score as well, but this should not bring a negative impact on them since their approval is not permanent.
  • It’s important for consumers to differentiate between a credit report and a credit score. Credit reports contain information including your loans, the debt balances, payment history, filed criminal cases, any bankruptcy report, your work and living station among others. 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 the 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 be able to 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 evaluate your credit score regularly 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 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)

The Debt-to-income is a ratio used by lenders to measure their client’s ability to manage their monthly payments and as well repaying for their debt balances. Do you have difficulties in calculating your DTI? Do not worry, follow the below formula and you will be able to determine yours. DTI get 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 ratio 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 for credit card lowers your debt-to-income ratio.
  • Keep your monthly debt-to-income ratio updated to determine your progress. To lower 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, type of loan you have, and the account duration since the time opened. However, there are essential things which lenders consider on customers 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. Also, a late payment estimates one to get a loan until the settlements get cleared.
  • Older accounts. Majority of workers prefer customers with a lot of credit history order than five years. The reason is capability of settling debts.
  • Remember, any purchases you make, are subjected from the credit limit. If you have a revolving debt (also Line of Credit (LOC)) and installment loans, this means it’s easy to acquire the credit card and you are able to handle different varieties of credit. Remember, any purchases you make, they are subjected from the credit limit.
  • No charge offs or collection accounts. Collections might arise from unsecured reports which include credit cards and personal loans. In a situation where account gets sold to a collection agent, the group can, therefore, appear as fraudulent accounts giving a negative impact on your credit scores.


Capital is the personal investment in consumers business which can get lost in case the market fails. Majority of 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 assets the consumers have been essential in our lives since they can help to 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, then your credit utilization ratio is 12% which is typically low. The ratio is low because anything which lies under 20% is considered a good credit utilization percentage or ratio.



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