Creditors will look at your credit score to determine your eligibility for a certain loan. However, this is only one of many factors they’ll consider.
Despite the score showing the overall credit health of an individual, creditors will want to understand what led to this final figure. They’ll analyze your credit report, which contains details such as the loans you took out in the past, how you paid them, and whether you’re in the market for new loans.
This report also contains civil judgments and bankruptcy information, but again, this isn’t enough. Creditors want to see more except credit score.
What more do they want?
Well, in this article, we’ll take a look at what else you’ll have to share with your lender.
1. Employment History
What does my employment history have to do with the amount I want to borrow? Well, the answer is” a lot. Your current income may be glowing and have the ability to qualify you for a favorable rate.
Nevertheless, your lender will want to put your employment history under the magnifying glass. Their aim to analyze your income stability. How long have you been at your current job?
The ideal period is about two to three years. This shows a stable profession and a stable paycheck, thus translating into stellar Credit Tradelines risk. If your history indicates job-hopping, your lender may flag this as a potential risk which may prompt the lender to increase the interest rate.
2. Liquidity
Apart from your income, lenders also want to know your liquidity status. Liquidity, according to Investopedia, refers to the degree to which an asset or security can be sold or bought in the market without affecting its price.
The reason lenders want to know your liquidity status is because you could run into a financial storm, such as losing your job or other financial difficulties. In such an event, your ability to repay the loan will be impaired, and if you have assets, the lenders know they’ll be able to recover their money.
Such assets include government bonds, stocks, savings and other money market accounts. If you have multiple liquid assets, then the lender will lower their interest rates since you are viewed as less risky.
3. Credit History
Again, your credit score is a number arrived at after analyzing several factors. This report contains details that show the probability if repaying a loan. Such details include:
- History of bankruptcy
- Foreclosures
- Outstanding debts
- Delinquency
- Previous credit applications
Note that you may have some of these blemishes on your report, but that won’t automatically deny you a loan. However, prepare for a higher interest rate. You can access a free credit report if unsure of the current situation.
4. Loan Duration
The loan duration is a critical element when taking out a loan. For example, if you intend on taking out a loan to be paid in a short duration, with some services, the lender will view this as a less risky. This is because they believe your ability to repay the loan is not likely to change.
Therefore, when applying for a loan, keep in mind its duration. By going for one with a shorter duration, you may have to pay more in monthly payments, but the good news is you’ll pay less in interest.
In addition, you’ll clear the loan faster, which will lower your debt-to-income ratio.
5. Your Total Income
Different lenders have different maximums for their debt-to-income ratio (DTI). As a result, if you intend on taking out a loan, then your ratio must not exceed the set maximum.
A high income means you’re able to repay the loan, and the lender will view you as less risky individual. However, a higher income doesn’t mean you’ll get favorable rates if you have ballooning expenses such as mortgages and rent, which may hike your DTI.
6. Collateral/Security
A secured loan requires some form of collateral to back it. Such loans come with lower interest rates compared to unsecured loans, since the lender is able to recover the money with ease should you default payment.
However, the value of the collateral will also come under scrutiny from the lender. For example, let’s say you want to take out a $20,000 loan and submit your car valued at $25,000 as collateral. In the event that you default, the lender will move in to resell the car, but the prevailing market price at the time may not be close to the price you valued it at.
For this reason, before giving you the loan, the lender will inflate the interest rates to cover the risk posed by the reduced collateral value.
7. College Degree
While some college degrees may carry a massive income potential, the student loans associated with them can be a turnoff for lenders. Besides, the starting salary for a college graduate isn’t always great. Throw the student loan into the mix, and your DTI plummets.
Therefore, lenders will think twice about extending a loan, and if they do, it’ll be at a high interest rate to cover the risk. As a result, a college education may be a hindrance to credit access, especially for new college graduates without an employment history.
Also, apart from your college degree, creditors may want to examine other professional licenses. For example, a license to practice law or medicine. Such licenses show the creditor you have a high probability of landing stable job and income.
What is the Best Way Out?
Financial hardships don’t knock on the door. They simply enter without notice; such times may push you into taking out a loan, but what happens if you don’t qualify? Chances are you’ll end up covered in financial frustrations.
However, you can avoid all this by taking a look at other factors affecting your loan approval. Don’t worry, though, because you can still get approved with good credit behavior such as making on-time bill payments, maintaining a low DTI, and credit utilization ratio.