6 Things lenders look at when deciding to lend you money

Banks and online lenders have a set of eligibility requirements when it comes to lending money. Anyone who applies for a personal loan should understand those standards. Lenders evaluate risk and need assurance that you’ll be able to repay the loan if approved. To do that, they look at the following six areas before giving final approval on a loan application.

1. Your credit score

Your credit score is a three-digit number that represents your creditworthiness based on your financial behavior. The credit score is based on factors like your payment history, the amount of debt you have, and how long you’ve had credit. Lenders will typically use this information to help them decide if they want to approve you for a loan or line of credit.

2. Your credit history

Credit history is not the same as credit score. Your credit history is a detailed record of your borrowing and repayment activities, including information like your past loans, credit card use, and payment history. Your credit history is displayed on credit reports issued by the three main credit reporting bureaus: Experian, Equifax, and TransUnion. Lenders pull these credit reports when they evaluate loan applications.

3. Your debt-to-income ratio

Lenders need to know if you can afford to repay what you borrow. One way they do that is by checking your debt-to-income ratio (DTI). This is a number, expressed as a percentage, calculated by dividing the applicant’s total monthly debt payments by their gross income. Lenders typically like to see a DTI of 35% or less for loan approvals.

4. Your income and employment history

Having a regular source of income is an obvious requirement for receiving a loan since you’ll need to repay the lender. Checking your employment history involves confirming that you have a job and how long you’ve been employed there. Longevity in a position shows lenders that you’re financially stable. That’s important to lenders because it indicates you’ll have the job throughout the loan term.  You also have the option to include other sources of income, like child support or alimony, when you apply for a loan, but it’s not a requirement.

5. Your liquid assets

Personal loans can either be secured or unsecured. If you apply for a secured personal loan, you may need to provide something of value, like a car, as collateral to secure the loan. Remember that the lender can repossess your vehicle if you default on the loan.

6. The amount and term of the loan

The final area lenders look at when deciding to lend you money is the amount you’re asking for and how long it will take you to pay it back. These are both negotiable. The lender may approve you for less than what you initially asked for or request that you accept a shorter loan term. This may not be what you’d like, but it could be suitable for building your credit.

The Bottom Line

The six things lenders look at before approving a loan are your credit score, credit history, debt-to-income ratio, employment history, liquid assets, and the amount and term of the loan. You can improve upon some of these areas before applying for a loan. Others will get better with time if you manage your money properly.

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