Loan agreement and pen on desk

What Lenders Look For When Borrowers Apply For Loans

Taking out a loan can help you quickly secure the cash you need to pay for unexpected expenses, make ends meet, purchase a home, or grow your business. But, will you be approved? If you’re considering a loan, it’s important to understand what lenders consider when determining whether or not they should approve a loan application. 

Credit Score

The first thing that lenders look at is your credit score. This three-digit number instantly tells lenders whether you are a high-risk or low-risk applicant. The higher your score, the less of a risk you are for the lender. 

Some lenders will automatically reject your application based on a low credit score alone. Other lenders will loan to borrowers with low credit scores, but they charge higher interest rates.

Payment History

Next, lenders will dig into your credit report to review your payment history. The goal of this review is to determine whether or not you are reliable when it comes to making on-time payments. If a lender finds dozens of late payments on your report, this could affect your ability to obtain a loan. But if you are always on time, this shows the lender that they will have no trouble collecting payments from you.

Length of Credit History

Lenders will also check the length of your credit history. This means they will look at how long you have had credit cards, mortgages, car loans, or other debt in your name. Borrowers with long credit histories are more attractive to lenders than borrowers who have recently started building their credit.

Income and Expenses

You will need to submit documentation to your lender that shows your income and monthly expenses. Why? Lenders need to see this documentation to make sure that you are capable of repaying the money that you borrow.

Lenders want to see that you are employed and earning a steady paycheck. Most lenders prefer working with borrowers that have held the same job for a long period of time. This proves that they will likely remain employed long enough to repay the loan. Lenders also want to verify that you make more than you spend every month. If your total monthly expenses are higher than your total monthly income, your application could be rejected.

Ownership of Personal Property

To apply for a secured loan, borrowers must agree to use their personal property as collateral. The personal property that is accepted as collateral can vary depending on the type of loan. To obtain a savings-secured loan, borrowers must use their savings account, whereas they are required to use their vehicle to obtain a car title loan.

Regardless of what is used as collateral, the lender must verify that you are the rightful owner of the property prior to approving your application. The lender must also calculate the value of the property to determine how much money they should allow you to borrow.

At this point, you should have a better understanding of what lenders look for when reviewing loan applications. Use this information to determine whether or not you are a good candidate for a loan.