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Lenders Look at More Than Just Your Credit Score

When applying for a loan, expect to share your full financial profile, including credit history, income and assets.
Credit Score, Personal Finance
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Lenders Look at More Than Just Your Credit Score

If you’re in the market for a loan, your credit score is one of the biggest factors that lenders consider, but it’s just the start. Lenders like to see an applicant’s full financial profile when deciding whether to approve a loan, and at what interest rate. So when you fill out a loan application, be prepared to share everything.

What lenders look at in your application

Credit history

A credit score is a three-digit number calculated from information in your credit reports that is designed to predict how likely you are to repay borrowed money. But a score doesn’t tell lenders everything, and many look at the reports themselves.

A blemish might not be a deal-breaker, but it can affect your interest rate.

They may look for:

  • Delinquent accounts, meaning those paid more than 30 days late
  • Unpaid collections accounts
  • A past bankruptcy
  • Foreclosures
  • Tax liens or civil judgments — although, starting July 1, 2017, the credit bureaus will not report those unless they include a Social Security number or birthdate as part of the identifying information
  • The number of recent applications for credit
  • Outstanding debts

While one or more blemishes might not be deal-breakers, having them on your credit report can affect your interest rate. If you’re not sure what your credit profile looks like, you can get a free credit report and credit score, updated weekly, from NerdWallet.

Income and expenses

To qualify for a loan, your debt-to-income ratio cannot exceed a lender’s maximum.

A lender is less likely to view you as a risk if you have a higher income, because you’re more likely to be able to pay all your obligations every month. On the flip side, a high income may not help you get a better rate if your fixed expenses, such as your rent or mortgage payment, are especially high. For example, when applying for a mortgage, your total debt-to-income ratio must be 43% or lower to qualify for a loan with a reputable lender.

Down payment

The lower your loan amount, the less risk to the bank. Therefore, if you have a large down payment, the lender is more likely to be generous with the interest rate. If your credit score is borderline and you don’t qualify for a loan, a sizable down payment might help you get approved.

Keep in mind that a slightly lower interest rate may not be worth cleaning out your bank account. It’s important to keep enough cash in savings in case of an emergency.

Loan term

The length of the loan is important. In general, lenders assume that a shorter loan means the borrower’s ability to pay is less likely to change over the life of the loan. Keep this in mind when you are applying for a loan. If you can afford a loan with a shorter term, your monthly payment may be higher, but you’ll pay less in interest over the life of the loan, and you’ll be out of debt sooner.

Collateral

If you’re applying for a car or home loan, the lender will look closely at the value of the vehicle or house because it will act as collateral for the loan. For example, say you want a $15,000 car. Add in $5,000 in after-market warranty and maintenance contracts, gap insurance and sales tax, and you’re seeking a loan for $20,000. Your loan-to-value ratio is 133% ($20,000 / $15,000 = 1.33). In this case, if the vehicle is totaled or you default on the loan and the lender tries to resell the car, it most likely won’t recoup the full $20,000. Therefore, the lender will likely call for a higher interest rate to compensate for the risk.

A loan with collateral, or a secured loan, typically comes with a lower interest rate than an unsecured loan because you’re pledging the collateral as repayment of the loan if you fail to make payments. We recommend caution when considering using your house or car as collateral when applying for a personal loan. If you don’t repay the loan, you can lose your asset.

Liquid assets

If you have liquid assets, a lender may view you as less risky and offer a lower rate.

You’re expected to use your income to repay the loan, but some lenders may want to know whether you have assets that can be converted into cash quickly to make payments in case you lose your job or experience other financial setbacks. These assets can be in the form of a savings or money market account, stocks or government bonds. If you have liquid assets to cover the cost of the loan, the lender may view you as less risky and may offer you a lower rate.

Employment history

If you’re applying for a mortgage, your current income may be enough to qualify you for a good rate. But the lender may choose to review your income from the past 24 months to measure income stability. If you have a spotty job history or you were unemployed recently, you might not be denied, but the issuer may still view it as a red flag. As a result, you could end up with a higher interest rate.

What you can do

You can improve your chances of loan approval with favorable terms by developing good credit behaviors like paying your bills on time, every time and keeping your credit card balances low.

Updated June 30, 2017.