Credit scores are one of the critical factors that determine a loan outcome. It’s a three-digit number that determines the creditworthiness of the borrower. While it’s a crucial factor, it isn’t the only deciding factor.
To ensure that they lend a loan to a responsible borrower who will repay the loan on time, lenders also check other factors besides the credit score. Lenders like to get the full picture of the applicant’s financial profile. So, when you apply for a loan, be ready to share other relevant info besides your credit score with the borrower.
Understanding all the factors that a lender uses to evaluate your loan can improve your chances of securing the loan. In this article, we walk you through the other crucial elements that a lender looks to determine whether to sanction your loan application or not and also to decide the interest rates to charge you.
What do lenders look for besides the credit score?
- Credit History
A credit score is a three-digit number calculated based on the info available on your credit report. While a score helps lenders evaluate prospective borrowers to determine where they fall on the creditworthiness scale, it doesn’t give the full picture. So, most lenders look at your credit report along with the credit score.
To give an easy to understand analogy, consider your credit score as the marks you score in an exam and your credit report as the report card that provides a detailed account of your academic performances.
Your credit report contains details of your credit history, which is how you have managed debt payments in the past. Generally, lenders look for the following information on your credit report:
- Current outstanding debts (type and amount)
- Delinquent accounts (accounts that have been paid late)
- Unpaid collection accounts
- Bankruptcies, if any.
- Number of recent applications for a loan/credit card
Curious as to what’s on your credit report? You can check your latest credit report by registering on CreditMantri. Get your latest credit score and report, along with a detailed analysis of your financial history. Once you receive the report, look for any errors or red flags on it and take the right steps to rectify them. Fixing the errors on your credit report helps you improve your chances of securing a loan. Also, it can give you a clear picture of how a prospective lender views your financial history.
- Downpayment Offered
The downpayment is the amount you agree to pay out of pocket while securing a loan. Let’s consider the example of a car loan. Generally, lenders sanction loans only up to 80 – 90% of the vehicle’s on-road price. The rest has to be borne by the borrower. The amount you pay for the car out of your pocket is known as the downpayment.
By increasing the downpayment, you reduce the loan amount required. This decreases the risk borne by the lender. Suppose you’re willing to offer a large downpayment. In that case, the lender is more likely to be lenient with loan sanction and offer you a favourable interest rate.
If your credit scores are borderline, then offering a large downpayment can help you tip the loan scales in your favour. However, remember that it doesn’t make sense to wipe your bank account clean to increase the downpayment. Always ensure that you maintain sufficient savings to help you in case of an emergency.
- Loan Term
Besides the loan amount, the loan’s tenure (repayment term) is another important factor that lenders look for. Generally, lenders prefer borrowers who opt for a shorter tenure. This is because the borrower’s ability to repay is less likely to change in a shorter timeframe than in the long term.
Also, opting for a loan with a short tenure is beneficial for the borrower as well. Though monthly EMIs are higher, you pay less interest and can get out of debt soon. So, if you have the budget to foot a larger EMI, then opting for a short loan tenure can benefit you in several ways.
- Age of the Borrower
The general rule of thumb is that lenders prefer borrowers who are in their prime earning age. Applicants close to retirement or students who are just entering the job market find it difficult to get loans sanctioned. However, remember that the applicant’s age is only one of the many factors. If other factors work in your favour, the lender may sanction your application, even if you fall in any of the categories mentioned above.
- Employment History and Steady Income
Generally, most lenders review your employment history for a minimum of two years at the time of loan application. A steady employment track record at the same company for two or more years indicates that you’re professionally stable and have a constant income source. For self-employed professionals, lenders look at your business statements for at least two years.
From the lender’s perspective, holding a stable job and steady income means that the borrower will likely repay the loan on time, thereby lowering the risk of defaults. On the other hand, if the applicant doesn’t have steady employment, lenders are reluctant to extend loans as they don’t have a regular income. Even if the loan is granted, the lender charges higher interest rates to offset the risk.
- Debt-to-Income Ratio
The DTI (Debt-to-income) ratio also plays a crucial role in helping lenders decide if they should extend a loan or not. The DTI compares the amount you spend on debts (credit card bills, EMIs, etc.) to your overall income.
A low DTI works in your favour as it indicates that your average income is higher than the debts you owe. On the contrary, a higher DTI puts you in the high-risk category, hampering your chances of loan approval.
- Relationship with the Lender
Generally, lenders prefer borrowers who have a long and healthy relationship with the bank. This is because the lender has a clear idea of the prospective borrower’s fiscal health: their monthly transactions, other investments held with the bank, etc. Having other assets that you can quickly convert to cash to pay your loan EMIs during a financial crisis makes lenders view you as less risky, thereby increasing your chances of securing the loan.
Your credit score is the starting point for loan eligibility. But, it isn’t the sole deciding factor. Along with the credit score, the other factors listed here play a crucial role in determining your chances of securing a loan at favourable interest rates. Be aware of all the factors that a lender looks for to increase your chances of getting the loan.