No matter who you take a loan out with, every lender will be looking at these 5 factors to understand your financial situation.
With the information they receive, they can paint a picture of your spending habits, the amount of money you earn, and if you can realistically afford the loan you are asking for.
Every lender will take a different approach and will offer you different deals, but in every background check, all (if not most) of these factors will be considered.
1. Your Credit Score And Record
Although no credit check loans exist, most lenders will look at your credit history to see how you handle money.
No credit check loans tend to be more expensive than their counterparts, as the lender assumes you are a high-risk borrower. As they believe you may not be able to pay them back, they will ask you to pay higher interest rates as security.
Most lenders will instead study your credit history to see how well you can borrow money and will adjust the interest rate accordingly.
There are lots of free and online credit score companies that can tell you what your credit score is. Depending on your location, you should search “credit score app” to find the most appropriate version for you.
Once you have completed the forms, you will be able to see how the lenders view you. You need to aim for a high score.
Credit scores summarize your utility bills, rent, mortgage, phone payments, and more. If you have ever borrowed money, the scores reflect how good you are at paying it back.
If you notice that your credit score is under 700s, you should try to boost it. You could do this by taking out a very low credit card and spending $5 a month. Then pay it back as soon as possible. This shows the bank that you can borrow money, and you have boosted your credit score without hurting your bank account.
2. Income And Job Security
Your credit score only shows a summarized version of your financial situation. Once you pass that barrier, the lender will look at how much you take home every month and how likely that will continue.
For example, if you are a contracted worker who receives a new contract every 3 months, you will be seen as less stable than a permanent worker. It doesn’t matter if you earn 10 times as much money, as the likelihood of you losing that income is high.
That being said, if you’ve worked for that company for over 5 years, the lender might recognize a level of security in your job. This might lead to discussions with your employer.
If you have a low income from an unsecured job, then you are very unlikely to receive a big loan unless you have a highly valuable collateral item. We will discuss collateral loans in more detail later, but these loans often charge less interest, as you can prove your ability to pay.
If you have a good wage from a secure job, you will likely breeze past this part of the application process. You will have shown that your income shouldn’t be too stretched, and your job is stable enough to last throughout the length of the loan.
However, depending on how much you spend every month, the lender needs to confirm that this assumption is correct. This leads us to expenses.
3. Your Loans And Expenses
Once they know how much you earn, the lenders will compare that information to how much you spend. This could be other loans you already have, like a mortgage or a student loan, your monthly spending, like utilities, as well as your daily purchases.
Once everything has been totaled, the lender will minus this information from your income to see how much wiggle room you have left to pay for the new loan.
If you spend all of your money by the end of the month, then you won’t be able to afford an additional bill. Seeing your expenses like this gives the lender a clear view of your actual likelihood of repaying.
However, this isn’t always a clear-cut process. If it looks like you could afford the loan with some social adjustments, the lender could give you suggestions. For example, if cutting out the gym, a wine club, and a weekly trip to the mall would cut down your expenses enough to pay for the loan, they could highlight this to you as a suggestion.
Not all lenders take the time to help like this. Instead, you should really consider the things you can cut from your budget beforehand. It could be that you don’t need to downsize your life at all, but preparing yourself for this conversation can help you show the lender that you are serious about the loan.
4. The Value Of Your Collateral
Some loans ask for “collateral.” This means that if you fail to pay the loan, they can receive an item worth the same amount. It is a form of security both for the lender and the borrower.
Mortgages normally fall under this category, as failing to pay your mortgage loan can result in the lender repossessing your house.
There are other loans that offer this option too, reducing your interest rate in the process as you are proving you can pay back the loan regardless. However, the value of the collateral will need to match the loan or be worth more than it to be accepted.
5. The Length Of Your Applied Loan
Lastly, the length of the loan, also known as the term, will determine how long you will need to be financially stable.
People close to retirement age often find it hard to get a loan, as the lender recognizes that their income will soon decrease. In the same vein, people on short-term contracts have the same issue, as the lender cannot confirm that they will have the same job in the future.
People in these situations might aim for a short-term loan, however, this means they will have to pay back the money a lot sooner. Depending on your situation, the compromise might be doable. These loans will likely have a higher interest rate.