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The Factors that Affect a Loan Application

Before applying for a loan, it is important to ask yourself how likely it is that your application will be approved. There are many factors which impact your borrowing profile including income, employment, current and past debt, and more.

Thankfully, you have some degree of control over quite a few of these factors. That means that if you educate yourself far enough in advance, you can do some planning before submitting loan applications to up your chances of approval.

Following are 8 Factors which Impact Loan Applications

1. Credit Score

Credit score is the first factor that most consumers consider when applying for a loan. This makes sense, considering that a credit score is a numerical representation of combined data on debts and payments. Naturally, this is a go-to figure for lenders assessing risk level.

While multiple credit scores exist, the most important is the FICO score. The FICO score consists of:

  • 35% Payment History
  • 30% Amounts Due
  • 15% Length of Credit
  • 10% Type of Credit

In general, lenders are looking for customers who have a long history of timely payments who clear their debts in full. A variety of types of credit in one’s portfolio is considered a plus.

Best Practice: In terms of amounts due, try and keep credit utilization to a minimum. You want to use your credit regularly, but pay it off as quickly as you can. You should not leave large outstanding balances due.

If possible, add variety to your credit portfolio. But only do this if you can keep up with all of your debts.

If your credit score is lower than it should be and timing is flexible, work on boosting your score before you apply.

2. Employment History

Another factor which lenders are interested in is employment history. Many borrowers do not even think about this when they are filling out their loan applications.

An employment history which is steady and consistent looks better than one fraught with job changes and periods of unemployment. For one, it points toward greater financial stability. For another, it may point toward a more predictable individual.

Best Practice: In most cases, it is only the most recent couple of years which interest lenders. If employment history over a two-year period has been steady, there are likely no concerns.

If there are gaps to account for, have an explanation ready. The best excuses are those which are common but do nothing to make a borrower look less viable. For example, one can say one took time off to raise children, take care of a family member, or study.

3. Current Income

While the past is important, the present is more so. Most lenders are going to want to see some sort of proof of income before approving a loan application. In fact, if they do not, it can be a red flag.

Best Practice: Lenders will ask for specific forms from employed borrowers. Contract workers and self-employed individuals may need to prove their income through alternative documentation.

What if your income isn’t up to snuff? If you cannot afford the loan, you should not be applying for it. Wait until you can increase your income (or decrease your debts) so that you can afford the loan.

4. Statements for Investments

Borrowers who have a 401(k) or IRA will want to furnish investment statements.

Best Practice: If you do not have a retirement account and are actively working, you may not need investment statements. So long as your income-to-debt ratio is solid, you should be fine. For retired borrowers, investment statements may be helpful in procuring financing.

5. Debt-to-Income Ratio

This ratio measures how your debt compares to your income. Remember, this may include not just the loans and lines of credit you are paying on, but also other bills and payments.

Best Practice: Ideally, debt-to-income ratio should be 35% or less. There are exceptions, however. Those with real estate investments, for example, may have substantial debts, but may still be profitable when other factors are accounted for. Be ready to explain and document these complex situations.

6. Housing

When lenders look at housing history, they are looking for the same thing they are with employment history: stability. Borrowers who move frequently are considered riskier.

Best Practice: If your housing history includes frequent moves, be ready to explain why. As with your employment history, if there is a way you can do this without having it reflect negatively on you, that is best. Perhaps, for example, you were upgrading in response to improvements in your income. This suggests increasing financial viability.

7. Loan Purpose

Lenders are not only interested in a consumer’s background, but how he or she intends to use the money. Someone who is borrowing to finance a home purchase, business expenses, or something else considered vital and necessary, is likely to be approved.

Someone however who is trying to borrow money for a personal project or to purchase a non-essential luxury item is less likely to be approved.

Best Practice: Try and borrow money only for purposes which will be considered practical and responsible.

8. Social Media Profiles

Many job applicants are aware that employers these days take a look at social media profiles. Lenders are starting to do the same with loan applicants.

Best Practice: Before applying for a loan, check over your social media history to make sure there is nothing up there you do not want a lender to see. Work on cleaning up your posts, and ask others to remove posts which might compromise a loan application.

Conclusion:

Taking Time to Evaluate Factors Influencing Loan Application Acceptance Can Increase Your Chances of Getting a Loan

Many consumers fill out and turn in loan applications without a full understanding of the factors which impact acceptance. When they are declined, they may not even know why.

It does not take long to look up your credit score, evaluate your debt-to-income ratio, and consider other factors which may influence lenders. If you do find some potential issues and you have time to work them out, do so before you apply.

Work to raise your credit score, pay off debts, and document housing and employment stability. If there are issues you cannot address directly, be ready to explain them. Taking these steps may dramatically increase your chances of being approved for a competitive, affordable loan.

Customer Notice

We strive to provide accurate information regarding personal finance and debt management, but it may not apply to an individual’s situation directly. This content is for informational purposes only and should not be considered as financial advice. PayDayAllDay.com won’t bear any responsibility in relation to personal decisions made based on it. You should consult your financial or tax advisor before making any financial decisions.
References and Sources

1. What is a Credit Score? Fair Isaac Corporation. Available at https://www.myfico.com/credit-education/credit-scores/

2. JMcHood (2017). How do Lenders Verify Borrower Income and Employment? Irrrl.Com. Available at https://irrrl.com/how-do-lenders-verify-borrower-income-and-employment/

3. 401(k) Plans. Irs.Gov. Available at https://www.irs.gov/retirement-plans/401k-plans

4. Julia Kagan (2018). Individual Retirement Account – IRA. Investopedia.Com. Available at https://www.investopedia.com/terms/i/ira.asp

5. Stephanie Armour (2014). Borrowers Hit Social-Media Hurdles. Wsj.Com. Available at https://www.wsj.com/articles/borrowers-hit-socialmedia-hurdles-1389224469

6. What a Credit Score Consists Of. Debtcounselingcorp.Org. Available at http://www.debtcounselingcorp.org/what-a-credit-score-consists-of/

7. What’s in my FICO® Scores. Fair Isaac Corporation. Available at https://www.myfico.com/credit-education/whats-in-your-credit-score/

8. Brittney Mayer (2018). 300 — 850: The “Credit Score Range” Explained (FICO & VantageScore). Badcredit.Org. Available at https://www.badcredit.org/how-to/credit-score-range/

9. FICO® Score Estimator. Whatsmyscore.Org. Available at https://www.whatsmyscore.org/estimator/

10. Purpose of Loan Sample Clauses. Lawinsider.Com. Available at https://www.lawinsider.com/clause/purpose-of-loan