Lending money comes with risks for both lenders and borrowers. For borrowers, the risk involves being approved or rejected for the loan amount. On the other hand, lenders also have to think about whether they are maximizing their return on investments in different forms of loans that they offer (such as credit card debt, mortgage loans, student loans, personal loans, etc.).
With so many factors working together to determine loan approval/rejection or interest rates, it is not easy to pinpoint which one will be most compelling for lenders to approve or reject an application. In this piece, we look at six factors that lending institutions may consider when assessing loan applications.
Is Means Of Finance Important?
The form of funding for which you apply certainly defines whether or not you qualify as well as the total cost of the funding. A car or house loan involving the buy-out of an asset that the borrower may revert if the loan defaults will have a lower rate of interest and different lending conditions than an uninsured personal loan in which the money paid out by the lender will not be used for buying the asset.
Top Factors That Influence Outcome Of Your Loan Application
Your Income And Sources Of Income
In most applications today whether it is for a car lease or mortgage, Lenders will want to see that you earn a steady income. Most financial lenders thrive by having as many income sources that they can identify, so they can likely cover the debts in the future if your debt pool gets large and difficult to manage.
This means, if you are self-employed, have online jobs, side gigs, or if you are married and have a spouse who earns a regular income, and/or receives rent from your tenants, the financial heads at Mr PayStubs affirm that all of these are significant pieces of data that will give the lender confidence in underwriting your loan application. It is also important to manage your expectations regardless because there are no guarantees.
Your Savings And Investment Balances
Savings and investment balances directly impact your loan eligibility. The more money you have in savings, the greater your ability to become a homeowner. For example, if you are applying for a loan against the value of an investment property and have savings, the net value is important. You can see this often on house loan approval letters as it may say something like ‘current assets $30,000, less current liabilities -$10,000’.
Your History Of Paying Your Bills
When you apply for a loan, one of the things that will determine if you are approved or not is your credit history. Banks are interested in knowing how responsible you have been paying your bills on time.
To do this, they may investigate your payment history by requesting copies of your credit report and contacting former creditors to find out how responsible you have been paying on time. If there has been a pattern of paying late or missing payments it is more likely that your loan application will be denied.
The Value Of What You’re Buying
There are several judgments and decisions made about your loan application. Lenders will factor in any information available to them. When accessing your loan application, they’re looking at what they consider valuable.
The value of what you’re buying and the price they’re willing to give you is inherently subjective. To get approved for a loan, you need to recognize the factors that influence lenders’ decisions and learn how to present yourself to be valued as more than just a good risk.
Your Existing Debt
The amount of debt you have can greatly influence your loan application outcome. Lenders and some other credit score models take into account if you are drowning in loans and find it hard to make your payments on time or in full. If they decide there is a potential for problems, you could be rejected for a loan despite meeting all the other criteria.
Your Credit Score
It is the calculation of how likely you are to pay your bills on time. Credit scores are used to determine whether you qualify for some loans and how much they will cost you if you do get them. A good credit score can help you to achieve mortgage approval easier, cheaper interest rates, and offers an opportunity for debt consolidation. A bad credit score, though, can lead to a rejection or higher interest rate.
It is not easy to get a loan. Many factors can influence your loan application outcome, including the size and type of the loan, your credit score and history, income, debt, and overall financial picture. If you have been denied a loan before, understand that if you can’t enhance the factors above, it might be difficult to get approved for another.