What do Lenders Look for Before Lending Money?

If you’ve ever borrowed money or are going to in the future, asking yourself, “What do lenders look for before lending money” will improve your chances of getting your application approved. This article will answer that question by arming you with insights into what lenders will not only be looking for but also how you can prepare in advance to gain the loan approval you seek.

Key Takeaways

• Credit score is a common denominator among all types of loan providers
• A debt-to-income ratio under 43% will help your chances for approval
• Alternative lenders often are more liberal with approvals
• You have alternatives if you are denied a loan

Factors Used by Personal Loan Providers

When reviewing your application for a personal loan, like one described in this FinImpact review, the lender has one concern: can you pay back the money on time and in full? They’re placing a bet on your ability to pay them back on time and using your history of paying your other debts on time to make an educated bet. To help them do that, they consider certain factors, such as:

• Your credit score and history. This is one of the most important factors lenders consider when evaluating a loan application. A credit score of 670 to 850 is in the good to excellent range and increases your chances of personal loan approval. 
• Your income. Lenders not only look at your income level but the consistency of your income. Seasonal workers and people paid primarily by commissions can find it difficult to get approved because of fluctuations in their income.
• Debt-to-income ratio. Your entire debt should be at most 43% of your income. 
• Collateral. Lenders look for assets they can seize if you default on your loan.

These factors are used by traditional lenders like banks and credit unions. However, alternative lenders like Upstart or Best Egg have more lenient requirements and require less documentation and no collateral through unsecured loans. 

Factors Used by Mortgage Lenders

Mortgage lenders are much more detailed and have more stringent requirements when lending money because they have much more money at risk than a personal loan. These lenders carefully consider:

• The size of your down payment. The more money you put down, the less you’ll need to borrow, which lowers the lender’s risk and improves your odds of being approved.
• Your credit history. The length of time you’ve used credit and how responsible you were paying back your creditors is critical in being approved for a mortgage. 
• Your work history. Lenders look for a stable employment history. A history of job hopping isn’t looked upon favorably. 
• Your debt-to-income ratio. How much income you have coming in every month versus the amount you pay to repay existing debt should be no more than 43% of your income.
• The value and condition of your home. Lenders won’t lend more money than your home is worth, which is why they require an appraisal before approving a loan.

Online banks like AmeriSave are known to be more liberal with application approval than traditional banks. Their decisions are not only based strictly on the numbers, but they will also consider the story behind them. For example, why you changed jobs will be considered, not just the fact that you changed jobs.

Factors Used by Student Loan Companies

Because many students applying for loans are fresh out of high school, their work history isn’t as critical in gaining approval for a student loan. But several other criteria are used, like:

• Your credit history. Financial decisions you’ve made in the past will be considered when determining your eligibility for a student loan and the interest rate you’ll pay on the loan.
• The amount of money you owe. A key factor here is how much you owe compared to how much credit you have been extended. It’s called “credit utilization,” which should be 30% or less.
• Institution Type & Course Load. The type of university you’ll be attending (public vs. private) and your course load (semester hours) will impact your approval and the amount of the loan

Depending upon your situation and based on the factors listed above, some student loan lenders will require a co-signer/joint applicant.

Alternative lenders like SoFi and LendKey are known to be very competitive with their student loan interest and application approval rates.

Factors Used by Small Business Loan Institutions

Small businesses often need cash infusions through loans to hire more employees and purchase inventory. When applying for a small business loan, the approval factors differ from personal loans. With small business loans, lenders factor in the following:

• Business revenue. Lenders are more likely to approve loan requests submitted by businesses showing increasing revenue as opposed to stagnant or declining numbers.
• A healthy credit history. Business borrowers need to show a history of being extended credit and paying their bills on time. 
• Age of business. Being in business for 5+ years shows your business has beaten the odds of business failure in the first five years, which, according to the Department of Labor, stands at 45%. 
• Collateral. If your business wants to borrow from a traditional lender like a bank, collateral will be required. 
• Type of business. Businesses in established industries are more likely to be approved than a new business concept.
• Business plan. Depending on the loan amount and term, a written business plan is often required for the lender to review.

Alternative lenders like Fundbox or Biz2Credit may not require collateral and are more likely to lend to newer businesses. 

Factors Used by Auto Loan Companies

With the average monthly car payment for new cars being $700, auto loan companies have firm lending practices in place. The factors they consider when reviewing a loan application are:

• Credit score. A good to excellent credit score will not only get you approved for a loan; you’ll also get a better interest rate the better your credit score is.
• Income. You’ll need to show enough income that the lender is confident you can afford your monthly payment.
• Length of term. The longer the term, the lower the payment. Lenders sometimes require longer periods for some borrowers to be approved.
• Down payment or trade-in. The larger your down payment or more valuable your trade-in is, the better your chances of qualifying for an auto loan.

Online lenders are often more liberal than traditional banks. They may be more lenient as far as income and credit score. Of course, you’ll pay a higher interest rate if you’re a subprime borrower. 

How to Improve Your Loan Approval Chances

Fortunately, there are strategies to improve the odds of loan approval. You can improve your chances if you:

• Know and improve your credit score. Paying your bills on time, not closing older accounts, and not applying for multiple new credit cards at the same time are a few things you can do to boost your credit score.
• Consider a co-applicant. If your credit or income is marginal and you have someone with a higher credit score and income apply with you (or co-sign), your approval chances will improve.
• Research lenders. All lenders don’t have the same criteria. Researching lenders’ approval requirements before you apply and have your credit pulled (which can negatively affect your credit score) may help you find a lender more likely to approve your loan request. 
• Don’t apply for more than you need. The greater the amount you apply for, the harder it is to gain approval for a loan. Limit your request to just what you need.
• Rebalance your debts and income. If your debt-to-income ratio is over 43%, pay down some of your existing debt or increase your income to lower it. The lower your ratio, the better your approval chances. 

Steps to Take When Your Loan Application is Denied

Unfortunately, you may find that your loan application has been denied. If that happens, don’t immediately give up. Instead, try these steps:

• Use savings. You may not want to use your savings, but it can help you put more money down and have to borrow less, which may get your application reconsidered.
• Ask family or friends. Having a friend or relative lend you money or co-sign for you may help you with your financial need for a larger down payment or loan approval.
• Review your credit report. Check for errors or discrepancies that may have lowered your credit score and resulted in the denial. Having errors corrected can be a difference-maker if you can have your application reviewed again.
• Apply for a smaller loan amount. For example, you may not be able to borrow $30,000 for a new car, but you may be approved for a $15,000 loan for a pre-owned vehicle.
• Shop for a new lender. You might find a lender with more liberal loan approval standards that will approve your application.

Final Word

Knowing what lenders look for before lending money and taking steps like reducing debt, checking your credit score, and applying for a smaller loan amount improve your chances of having your application approved. It may take time to get your financial house in order to be approved for a personal loan or mortgage, but stay the course, and you’ll get there.