In a world crammed with several financial challenges, loans offer us the opportunity to take care some needs even when we lack the money. There are several types of loans, we have the mortgage loan, student loan, personal loan, etc. If you are looking for the answer to the question: “What do banks consider when applying for a personal loan?”, you are in the right place. Let us begin.
When requesting for a personal loan, most banks consider your credit score, credit report, income, ongoing EMI’s, age, occupation and your repayment history before approving your request.
Personal loans are short term loans that usually last for two to five years. The period for the loan is fixed and doesn’t change like a credit card or line of credit. Most personal loans are between $1,000 and $100,000, though this can increase, but it all depends on your need and creditworthiness. Each lender or bank sets it personal limitations regarding the amount of money you can lends and its duration or payment period.
What do Banks Look at When Applying for a Personal Loan?
Personal loans can come in handy especially when you have a project or a financial issue on ground that requires urgent attention. It could be acquired to take care of things such as your home renovation, emergency medical expenses, etc. You could also apply for a personal loan for the purpose of establishing a business.
Just like other types of loans, getting a personal loan involves some requirements which must be met for your loan application to be approved. These requirements or criteria varies for each bank. The main reason why banks setup these requirements is to ensure that you have the capacity to repay the money they’ll be lending you.. No one would want to lend money to an individuals who can’t pay back.
Loans such as mortgage or car loans are often secured by a collateral such as a house, car, etc., but this is quite different for personal loans. That is another reason why banks adhere to strict eligibility criteria before they approve your personal loan application.
This type of loans can be gotten from several types of lenders, such as traditional brick-and-mortar banks, and online lenders. These institutions or individuals provide loans to people with diverse types of credit scores, credit history, and income level including other requirements. Irrespective of what your credit score or income may be, there exist a lender out there who can approve your request to apply for a personal loan. Finding a good lender that agrees to your terms and can offer you the loan at a considerable interest rate can help you save a huge amount of money.
It rained heavy the previous night and your roof leaked, again, due to its perforated state. It’s quite dilapidated and needs refurbishing but you lack the money to fund the upgrade. A friend of yours advised that you visit a bank and apply for a loan so you have the required cash to fix your leaking roof. You consider it to be a good idea, but you aren’t quite sure of what you need to qualify for the loan. Of course, you are probably aware that banks consider your credit score, but that is not only what these banks consider when deciding whether to offer you the loan you need.
To get a better understanding of what these factors entails and why they are so significant, let’s look at some of them individually.
Your employment history and income:
Banks would want to be certain that you can repay what you borrow, thus, they would want to see that you have adequate and consistent income. The income requirements depends on the amount of most you wish to borrow. So if for instance you are borrowing $100,000, lenders would need to see that you are financially capable of repaying the loan on the agreed date. You will also have to show that you have a secured employment. Self-employed or newly employed individuals may find it hard to get a loan compared to those who are full-time workers of prominent and stable companies.
Credit:
This is one common thing most lenders consider before approving your loan request. Your credit report and credit score must satisfy the lenders if you are to get the loan you seek. A poor credit score can scare away any lender because there exist a huge possibility that you may not be able to repay the loan. Having a credit score of 700s or 800s can increase your chances getting that loan.
Your debt-to-income ratio:
Your debt-to-income ratio is much related to your income. If you have a low debt-to-income ratio, you have a good chance of getting a loan. But if your debt-to-income ratio is high, probably greater than 43%, which means that you’ll need more than 43% of your income to settle the debt, most creditors won’t accept you. If your credit is good and your monthly income is high, you may be able to acquire a loan with a debt-to-income ratio of 43% and above, but most creditors would rather turn you down than take the risk.Be strict on how you use your credit cards so you don’t amass debt that wreaks havoc to your debt-to-income ratio.
Before you take any loan, ensure you do your homework. For instance, for mortgage loans, it may be possible to change your mortgage due date but when it comes to personal loans, this may be impossible. Having a knowledge of this fact and others can help you plan well.
Your collateral value:
The value of your collateral is key in obtaining a good loan. A collateral could be anything you own such as your car, house, company, etc. which could be claimed by the bank if you fail to keep up with your loan payment. Loans that involves collateral are regarded as secured loans while those that doesn’t involve collateral are known as unsecured loans.
The value of the collateral you’ll be offering the bank will determine the amount of money you can borrow. For instance, when you purchase a car you can’t borrow more than the current value if the car. That is because the bank needs the guarantee that you it will be able to recoup its money if you fail to repay the loan.
What is the Best Reason to Give When Applying for a Personal Loan?
Loan consolidation or debt repayment is one of the best reason to give your creditor when applying for a personal loan. If you have a huge credit card debt or a debt that have high interest rate, you can repay them using this loan. This act is known as debt consolidation.
Provided you meet the requirements of the lender, some usually don’t care what you intend to use the loan for unless you feel like telling them. But because the requirements of all lenders vary, you may meet a lender who insists that you tell him or her why you need the loan. If a situation like that arises, you would definitely want to provide the creditor with the best reason(s). Ensure that you say the truth because failure to do so may land you in a severe financial situation.
The aim of debt consolidation is to secure a lower interest rate and be free from debt. Other reasons to give your creditor is unexpected emergency expenses, car repair, home renovation, etc.
What Information are Needed for a Personal Loan?
Information needed for personal loan: employment and income information, personal credit report, bank account information and routing numbers, collateral ( depends on your credit situation), proof of employment, bank statements, state ID, social security number, and employer’s contact information.
To apply for a personal loan, irrespective of the amount, you need to provide the lender with some information or documents. This documents would contain several information regarding the loan and the agreement between the involved parties.
If you can provide the above-mentioned information, then you able to progress to the next stage without any difficulty. You should also note that all lenders are not the same, so the information they need may vary.
How do I know if I Qualify for a Personal Loan?
Lenders usually use several credit and non-credit factors to evaluate the suitability and eligibility of borrowers. These factors are age: location, employment and income, citizenship status, education, assets and collateral, credit rate, credit utilization ratio, repayment history, debt-to-income ratio, credit mix, new credit etc.
If you don’t qualify for the loan, that is, if you fail to meet the requirements of the lender you won’t be given the loan. These requirements are not the same for all lenders, they vary. So if you fail to meet the requirements of a certain creditor, it is advised that you try another; perhaps you may find a lender that can accept your loan request.
To qualify for a personal loan, you will have to meet the above-mentioned requirements. Though these requirements aren’t the same for all lender. So if you visit lender A and he says that you don’t qualify, go to another lender he may decide to help you. Also, having a closed account may hurt your credit rate. If you have a closed account, ensure you find out if mortgage lenders look at closed accounts before applying for a loan so you don’t waste your time.
Mortgage Loans and Personal Loans:
Mortgage loans and personal loans are common and they constitute a huge percentage of loans obtained by individuals in the US. In applying for a mortgage, ensure you liaise with a lender that is compassionate, one that can consider offering you a mortgage even with late payment on your report. Getting a mortgage with no employment but huge deposit is possible but rare. If you are lucky enough, you might find such type of lender.
Mortgage loans are usually used to finance the purchase of a home . Personal loans are short term loans used for the finance financial needs such as the refurbishment of a home, emergency medical bills, etc. Borrowers often find it hard to grasp why personal loans are smaller than other loans. Well, it is that way because it is a short-term loan.
Money is hard to get these days. Several people find themselves in debt that that wreck their financial life. Getting out of debt is more than simply making monthly payment on that debt. Of course, making frequent monthly payment is a good way to reduce your debt, but if you fail restrict how you use your credit cards and adopt the best repayment strategy, you may make those payments in vain. Also, debt consolidation loan is a good way to pay off debts quickly but they come with their pros and cons. For instance, that $50,000 debt consolidation loan you are planning to take has its pros and cons. So do your homework.
When it comes to late payments, personal loans differ from mortgage loan. For the sake of your sanity and strive towards ensuring that you aren’t 60 days late on your mortgage payment. The worst begin to happen when it gets that late. For personal loans, the ball game is quite different. The bottom line is, ensure you make payment on or before the due date.
If you have lots of debts hanging around your neck, and you finding it hard to repay these debts, you can seek professional assistance. This assistance comes in the form of programs that help people like you repay their debt without hardship. Do your research and take action!
