man doing paperwork in the office

7 Things Lenders Look at When Considering Your Personal Loan Application

In a personal loan application, your credit score plays a big part in getting approved, but it’s not the end. Every lender has many different considerations when applying for personal loans. It’s crucial that you iron every detail to maximize your chances of getting the loan that you need.

There are several factors that banks and financial institutions look at to make sure they can trust you with their money. Whether you apply for personal loans online or face to face, these can give you the edge that you need. Here are 7 things lenders look at. Many of these details are something you should be aware of.

1. Credit Score and History

As we noted initially, your credit score is one of the biggest factors, not only to get a loan approval but to also get the best personal loan rates. Credit scores involve your general history of borrowing, including but not limited to:

  • Payment history
  • Outstanding debt
  • Length of credit history
  • Credit mix
  • Number of new credits opened

As you learn how to get a personal loan, you’ll notice that credit scores move anywhere from 300 to 850, going lower in some institutions. If you want a better personal loan, you want a higher score to get the best interest rates. 

For first-timers, you want to build your credit score first before applying for personal loans to build your credit history. This gives your potential lenders a good reference point they can start with.

2. Income and Employment History

In any scenario, lenders and financial institutions would like to make sure that you can pay back what you owe them. They will do their best to mitigate risk factors and variables, so another factor they look into is your income and employment history. Apart from credit score, this plays a major part in your personal loan application.

Most income requirements change depending on the amount you’re borrowing against the income that you have. The higher the amount you borrow, the more chances the lender will be critical of your income and employment. They will inquire into the breakdown of your income and how you will factor your loan payments into it.

They will also look at your employment stability. How stable are you in your company/business to make sure there’s a steady stream of income? People early into their employment or those newly self-employed may experience a harder time getting personal loans online due to their limited employment history.

3. Liquid Assets

In many situations, lenders will try their best to help borrowers get a personal loan. Even if you have a steady income and a good credit score, they want to make sure they can get their money back, especially from those starting new ventures. Some lenders will ask for a list of your liquid assets that you can easily convert to cash.

Liquid assets are things that you can sell as soon as possible to pay for the amount you borrowed. These can be anything from cash, stocks, bonds, and, in a few specialized lenders, cryptocurrency. 

The idea is if you lose your job or go into an unsuccessful venture, you have liquid assets to cover the amount you borrowed. Lenders are more likely to approve your personal loan application if they can see you have liquid assets prepared.

4. Debt-To-Income Ratio

Related to your income, the debt-to-income ratio is something that the scrutinizing lender will look at. If you have an existing loan to your name, like a car title loan, lenders will see if you can still cover the amount you’re requesting.

Financial institutions would like to see a debt-to-income ratio of 36% or lower, and an extreme high of 43%. Out of this ratio, the ideal situation is to have a maximum of 28% or lower going to your mortgage. Anything above 43% is a red flag to lenders, which may result in a denial.

Some borrowers who have a 43% or higher debt ratio can still borrow money. Even then, it only happens if they have an absurdly high income, good credit, or agree to higher personal loan rates. However, most lenders won’t risk obvious red flags, so it’s best to pay off the amount to lower your ratio.

5. Character

One of the more stringent requirements that banks and lenders have is character, which refers to a thorough check of your personal and business history. Some lenders will look into your reputation across the business, which may consider:

  • Clean personal credit history
  • Reliable references
  • Background
  • Education
  • Sound business credit

Character is most crucial for high-value personal loans that go into tens of thousands. Without a good character profile or with a history of delinquency in your personal or business credit history, you may fail to secure the amount you want.

6. Loan Term

When you learn how to get a personal loan, one vital detail you need to look at is your loan term. Lenders do the same, checking the viability of the loan that you get throughout your payment time.

Most careers will be stable for a few years, but a lender looks at your financial viability over time, especially if your payment term is years down the line. Lenders are usually more comfortable with loans that have shorter payment terms due to lower risks.

Shorter loan payment means you’d need to pay a higher amount per month. You will also have lower personal loan rates, so it will sort everything out at the end. 

Regardless, consider if you have the capacity to pay higher amounts for a shorter loan period. The shorter your loan payment is, the better chances you have to get a personal loan application approved.

7. Economic Climate

A critical factor that some lenders consider when you apply for personal loans is the condition of the industry you’re employed at. Economic climates change every year – something you’re unlikely to have control over.

If you come from a high-risk industry that has a strong layoff rate, your lender will likely deny your application. The idea is that the financial institution is looking to protect itself in the event of a sudden economic downturn, where the chances of you getting laid off can be high.

To get approval, most lenders will look at your employment history and your ability to weather tough economic conditions. This can reflect in your employment history and your credit history.

The Bottom Line

A personal loan application should neither be tiresome nor stressful. Whether you’re getting your personal loan online or in person, you need to have all your details and documentation prepared for questioning. 

Look at your personal history and see if you have good facilities for a personal loan. Consider the factors we listed and shop for lenders that consider your current situation. Remember, the lower your personal risk, the easier it is to get a personal loan.