Are you considering taking out a loan? It’s no secret that drafting an approvable loan application can be intimidating. Applying for a loan is a big decision and one that shouldn’t be taken lightly. But what do lenders actually look at when you apply? What is a loan factor?

Knowing the factors lenders and banks consider can help you make the most informed decisions when it comes to your finances. This blog describes the seven key factors banks and other lenders consider before granting a loan.

From your credit score to your income, you will know everything that maximises your chances of being approved. Let’s get started!

7 Critical Factors Lenders Consider When Evaluating Loan Applications

Knowing these 7 critical factors for lenders can help you improve your chances of loan approval on favourable terms and conditions.

  1. Credit Score

Your credit score is a significant factor in loan approval. Lenders want to know that you are a responsible borrower and have previously managed your credit responsibly. Your credit score reflects your past credit behaviour, so lenders use it to assess whether you’re likely to repay the loan in the future.

Don’t worry if you don’t have a credit score yet. Nowadays, many FinTech companies are willing to provide loan without credit score, depending on other reliable factors.

  1. Income and Employment History

Your income and employment history are also important considerations for lenders. They want to know that you have a steady source of income you can use to repay the loan. They may also consider whether your job is secure or if you’re likely to be laid off soon.

The amount of money lenders anticipates you to make each month will depend on the size of the loan you’re requesting.

  1. Debt-to-income Ratio

Your debt-to-income ratio is also a significant factor in loan approval. This ratio compares your total monthly debt payments to your gross monthly income. Lenders will use this ratio to determine if you can comfortably afford more debt.

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Generally, it’s best to keep your debt-to-income ratio below 40%. Anything higher than that could be a hindrance when it comes to getting a loan. So, it’s wise to try and stay within that limit.

  1. Value of Your Collateral

Loans with collateral are known as secured loans. Collateral is an asset you agree to provide to the bank if you can’t make your loan instalments on time. In case you are applying for a secured loan, lenders will consider the value of your collateral.

This is because the collateral serves as security for the loan. The lenders want to ensure that the collateral’s value is enough to cover the loan amount if you cannot repay it.

  1. Loan Type and Loan Term

Different loan types come with different terms, interest rates, and fees. Lenders want to ensure that the loan you’re applying for is the right one for your needs. After reviewing your application, banks sometimes decide what kinds of loans you are qualified for.

You should consult extensively with the lender in such scenarios to choose a loan type that best suits your requirements and financial situation.

  1. Size of Down Payment

The size of your down payment can also influence whether or not you are approved for a loan. Generally, larger down payments show lenders that you are serious about repaying the loan and have enough funds to cover the loan amount.

Making a larger down payment is also beneficial for your financial situation, as you end up paying lower interest due to the initial lump sum.

  1. Liquid Assets

Finally, lenders may consider your liquid assets when evaluating your loan application. Liquid assets are funds that can be easily converted into cash, such as savings accounts, stocks, and bonds.

Having liquid assets shows lenders that you have the resources to cover the loan amount in case of an emergency. 

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Lenders consider several factors when evaluating loan applications. And these 7 factors are most vital for assessing your creditworthiness as a potential borrower and the likelihood of repayment.

Thus, take some time to understand and prepare for these criteria to increase your chances of being approved for a loan with the best loan terms and conditions.