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Credit score is the primary factor that we expect lenders to care about when applying for a loan. However, many other things are part of the considerations when deciding whether or not to approve your loan application.
Some other items that are part of a lender’s deliberations include your income, expenses and length of employment. Perhaps even more surprising, some lenders don’t use credit score as a primary consideration and make lending decisions based on your broader financial profile and history.
Income and employment history
Employment and income verification are important. The lender wants to know that you have money coming in to cover the loan payments. With online lending, there’s also a need to protect the lender (and the borrower) from identity theft.
Income verification generally means providing pay stubs or a tax return. If you’re self-employed, income verification may include providing the lender copies of your past years’ income tax returns.
Why lenders care: Lenders want to confirm that you have sufficient income to make the loan payments and a stable employment history.
How much money you have in checking or savings can also be a point of interest. A lender may want to review your bank statements to check your cash flow. Having an existing relationship with a bank in your area could improve your chances of approval, especially if you borrow from that bank. Lenders also consider mortgages and other active loans during the approval process.
If you have a lot of built-up savings, a loan secured by a certificate of deposit could be an alternative to an unsecured personal loan. A certificate of deposit is a savings account that grows in value over a set amount of time during which you cannot access those funds. Loans can be secured with these accounts as collateral.
Why lenders care: Lenders want to see that you have other resources to pay your loan if you encounter financial challenges, such as a healthy savings account.
Lenders’ credit models
Peer-to-peer (P2P) lenders put together their own credit models for loan approvals. The Federal Trade Commission (FTC) explains the standards these models must follow in a consumer publication: “Under the Equal Credit Opportunity Act, a creditor’s scoring system may not use certain characteristics such as race, sex, marital status, national origin or religion as factors.”
The law allows creditors to use age, but any credit scoring system that includes age must give equal treatment to applicants who are elderly.
Why lenders care: P2P lenders care about credit scores but often have more relaxed borrowing requirements. Their custom credit models consider additional factors that allow applicants with lower credit scores to qualify for borrowing.
Risk-based pricing means the worse your credit is, the higher the interest rate on your loan. You have to do a cost-benefit analysis to decide if you’re willing to pay the interest rate to borrow the money over the loan term.
Why lenders care: The risk of default posed by a potential borrower is an important consideration for lenders. Lenders charge higher-risk borrowers a steeper interest rate to account for potential defaults.
Some types of loans, such as title loans and home equity loans require collateral. In other words, you are putting your property on the line. If you do not pay your loan, the lender can take what you used as collateral.
If you choose a loan with collateral, also known as a secured loan, your interest rates will likely be lower than other loans and credit cards. The lender is less likely to lose their money because of the collateral.
Why lenders care: Lenders care about their ability to recoup their funds should you default on a loan. Applicants who have assets as collateral reassures lenders that they will have other avenues to collect the money owed if necessary.
Some lenders also people to have cosigners or joint borrowers. If you have poor credit but can sign the loan with someone in a better financial situation, the lender may be more willing to give a favorable interest rate.
Not all lenders offer this option. If you have trouble finding an online personal loan option that works for you, consider asking a local bank or credit union. Local financial institutions often have a few more options when it comes to borrowing.
Why lenders care: Similar to having assets lenders can seize to recoup funds should you default, having a joint borrower reassures lenders that providing the loan will be less risky. When you have a co-borrower, the lender knows more than one individual is financially responsible for repayment.
In some cases, with some lenders, your education level can also impact approval odds or the interest rate you may be offered. This is because lenders perceive those who have college degrees as having a higher earning potential or more stable employment.
The US Bureau of Labor Statistics (BLS) reports that one’s income and job stability increases significantly with education level.
Why lenders care: Some lenders believe data points such as college degree or field of study indicate that an applicant is less of a risk for default because the applicant is more likely to have steady employment or a certain income level.
The bottom line
Your chance of being approved for a loan depends on several factors, and it is important to consider the full scope of your financial situation before deciding on a lender or applying. If you don’t have an ideal credit score or history, you may be able to get a loan from a lender that considers other factors.
If you are concerned about your credit score, don’t jump into easy-looking options like a payday loan to get the money you need. Look into lenders that offer bad credit loans with fairly reasonable rates and flexible eligibility requirements. Consider lenders that look at other factors, such as your prior relationship with them or other factors. You likely have more options than you realize.