Are you thinking of getting a loan now or sometime in the near future? Admit it, some of us take good care of our credit report because somewhere in the back of our minds, we know that it will help us get a loan. Largely based on our payment history and credit usage, credit scores give lenders and idea how likely you are to default on a loan. If you have a good or great credit score, creditors would know that they are taking less risk by loaning money to you.
However, not all lenders base their loan approval on credit scores alone. Credit scores are just one factor, albeit probably the biggest factor that could affect your getting approved on a loan. Subprime lenders, for example, know that their borrowers don’t have that amazing credit scores so they look at other factors as well. Thing is, loan approval isn’t an exact science; there is no way for you to know 100% if your loan is going to get approved. In fact there are individuals with great credit scores that still get denied on a loan.
On this episode, we will discuss some of the heaviest factors that could influence lenders to approve your loan application. Here they are.
Proof of income
Getting a loan means asking creditors for money today, with a promise that you are going to return it in the future. However, such promise would be empty if you have no source of income to use as payments in the years to come. In your loan application papers, banks or creditors would ask you to state how much your gross monthly or annual income is. For all we know, we could simply pull numbers out of thin air and put it on paper. There is no way for creditors to verify the income you stated except to ask you for a proof of it. Some would ask for copies of your monthly pay slip; some would ask for a copy of your tax return, or any proof that you indeed have some income source at the moment.
Job history and security
How long have you been in your present job? Where do you work, who is your employer, and what exactly do you do? Generally, if you are just under one year in your present job, then lenders need to be further convinced that your job can be considered secure. They will further investigate and ask more questions about your job. They could probably look at regular bonuses you receive from your company, or income you receive from other sources such as investments.
For self-employed individuals, on the other hand, they will need to provide proof that their business has been their source of income for such time already.
Where have you been living in the last 5 or 10 years? Have you been moving from one house to another after just one year of staying? These questions are important because lenders look at your housing history as an indicator of your income stability. Individuals or couples who are financially and professionally stable tend to stay longer because they have stable jobs. They aren’t kicked out by their landlords or moving to a different place for reasons like cheaper rent or neighborhood.
How long has your savings account been since it was opened? Having a record of an active savings account for a long time also indicates that you have good money management skills. Being able to put away money in a savings account is not easy. Being able to put it away for long is amazing and creditors could take it as an indicator of proper financial habits.
How much is your debt and how much of your income goes to paying it every month? Debt-income-ratio is your monthly debt payments divided by your gross monthly income, multiplied by 100. For example, if your monthly debt payment is $2,000 and your gross monthly income is $6,000, your debt to income ratio is 33%, which by the way, is still a good ratio. Experts recommend having only up to 33% of debt-to-income ratio. Having beyond that ratio could indicate that you are taking on too much debt that your income can handle.
Recent payment history
Your recent payment history with your current lenders is a strong indicator of your ability or inability to pay the loan you are applying for. If you have hard time paying your current debts or bills, then topping it up with a brand new debt would make it impossible for you.
Thankfully, your past payment history from, say, 3, 5 or 10 years ago, is not that important to lenders anymore because your present financial may have changed for the better already. However, they are definitely going to look at how you have been with your bills recently. So if you are planning to get a loan in the future, it would make a good impression on your lender if you start paying on time now.
Last but not least, your credit score
A borrower’s credit score is the yardstick most commonly used by lenders. When they evaluate your loan application, you can count on them looking at your credit score. It is not necessary to keep a daily record of your credit score because it does not change that often, but it is important to know what your score is. That way, you can understand your current situation and take the necessary steps to improve or maintain your credit standing.
Getting approved for a loan, whatever you intend to use it for, is exhilarating. It could be for a new car or a home you can call your own. Some of us say that lenders are just predators looking to make you their slaves for life. That’s not true. By affording us the ability to borrow money, lenders are helping us achieve what we want in life. We have a choice whether we borrow or not. If you choose to take on a loan, however, you should understand that it comes with a responsibility that you should commit to. Keeping that responsibility requires proper money management, so that you can pay back what you owe as stated in your contract and avoid breaking your lender’s trust.