What Lenders Consider Before Giving You a Loan
Most people hope to achieve financial security so that they can afford to Retire by 40. However, that will involve great financial discipline, loans will play a significant role in helping you achieve your dream. Creditors will look at your credit score and credit report before determining your eligibility for a particular loan. A credit report is a summary that outlines how you have repaid previous loans and bankruptcy information. However, apart from credit score and credit report, here are other factors that creditors consider.
Employment and Credit History
Your employment history determines your income stability. According to experts, the employment history of not less than three years puts you in a better position to receive the loan at a low interest. Nonetheless, if you do not have a stable job, the creditor may award you the credit but at very high interest rates.
Credit history determines your probability of repaying the loan and is arrived by analyzing several factors. These factors include foreclosures, delinquency, a history of bankruptcy, and outstanding debts. Therefore, having any of those flaws in your account influences lenders to award you the loans at a higher interest rate.
Loan Duration
The loan duration is a crucial element when taking a loan. Creditor experts cite that when searching for a loan, go for those with shorter duration. As much as you will pay higher monthly installments, you will pay less interest, which is economical. Additionally, you are going to clear the loan faster, which lowers your debt-to-income ratio.
Your Total Income
Different creditors have different maximums for their debt-to-income ratio; therefore, if you plan on taking a loan, your ratio should not exceed the established maximum. A high income implies you can repay the loan, and you have a low risk of defaulting. Nonetheless, a high salary with ballooning expenses such as mortgages and rent increases your DTI, making the creditor set stricter Terms and conditions.
Liquidity
Liquidity refers to the degree at which an asset or security can be bought or sold without affecting its current market price. Your liquidity status determines how the lender will recover his/her money if you have assets, and you are unable to repay the loan. According to finance experts, having multiple liquid assets such as government bonds, savings, and stock, increases your chances of paying low interest rates.