Whenever you borrow money, it’s a good idea to remember the whole things involves risk — for both you and your lender.
As a borrower, you have to weigh up the risk of owing that much money. Your task involves calculating your APR and making sure you can cover all your payments on time.
On the opposite side of the equation, your lender can’t look at your budget, but they can assess other financial markers that help them determine whether you can, in good faith, afford to pay them back.
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Each lender will tell you how the process works according to their unique policies. However, most lenders will look at some or all of the following five financial stats before approving your loan online.
Table of Contents
1. Credit Score
Legitimate lenders will always perform a credit check before making a decision. This peek at your credit history tells them how you’ve handled personal loans and lines of credit in the past.
A lender scans this file for any negative entries, like delinquent payments, charge-offs, or a high utilization ratio. These entries indicate you had trouble handling your previous loans, which flags your ability to repay more loans in the future.
A lender might deny you, depending on what they see. However, you can search for emergency loans for bad credit online.
2. Employment History and Income
If a credit score gives lenders a look into your financial past, your employment and income reveal insights about your current financial situation.
Don’t be surprised to supply information about your employment history, as well as your current employer, pay schedule, and income. This information paints a picture of your financial capacity at this moment in time. It helps lenders determine if you earn a stable paycheque that’s large enough to cover future loan payments.
3. Debt-to-Income Ratio
Another way lenders might check your current ability to repay outstanding debt is by calculating your debt-to-income ratio, or DTI.
Your DTI reflects how much of your pre-tax income you spend on existing loans and lines of credit. To find out yours, you can use this calculator. If you have something above 40%,it casts doubt on your ability to handle another loan added to your plate. At this ratio, you may not have enough income leftover to cover all your responsibilities.
4. Collateral, if Applicable
In the financial world, there are two broad categories of financial products: secured and unsecured loans. Secured loans are backed by collateral, a valuable asset that you may forfeit to your lender if you can’t pay what you owe.
Car financing and mortgages are the most popular versions of these secured financial products. However, you may find secured lines of credit and credit cards that also use your car, home, or other valuable possession as collateral.
If you apply for a secured loan, be prepared to have your asset’s value evaluated. If you apply for an unsecured financial product, you won’t have to provide collateral.
Lastly, some lenders may look at additional financial information before they make a decision. Depending on your financial product, you might have to show your savings or investments that can help you repay the loan.
Liquid assets such as savings can help you mitigate the risk you represent. After all, you can rely on these savings to cover your payments, even if you lose your job.
Your next loan or line of credit doesn’t hinge on one thing, but several. Ask your lender about how they make their decisions to learn more about what you need to supply.