Loans are available from a variety of sources, including banks,
credit unions, car dealerships, mortgage brokers, and payday loan
companies. There are a number of factors to consider when applying
for a loan:
- Can I qualify for a loan?
- What type of loan is right for my needs?
- What is the cost of credit?
- What are the terms available?
These factors vary by lender, so it is important to research
your options to ensure you select the right lender and the right
loan for you.
Qualifying For a Loan
A complete and thoroughly documented loan application, along
with a credit report, provides the lender with the information
needed to make a credit decision. Before granting you credit, or
extending your current credit limits, most lenders will assess your
creditworthiness using some variation of "The Five C's of Credit,"
the basic components of credit decisions.
Capacity measures your ability to make the monthly loan
payment based on your current income, other loan obligations, and
monthly expenses. The lender is interested in your long-term
ability to repay the loan, so your occupation, employment history,
and educational background are reviewed.
Collateral is the property that secures the loan in the
event of default, such as a home or car being purchased with the
loan proceeds. The loan agreement gives the lender the right to
seize the property if the loan is not paid. The lender considers
the type of property and the current and future value of the
property when determining the loan term and amount. For example,
the value of a car declines over time, so the term on a new car
loan is typically longer than the term on a used car loan.
When you borrow money, your credit history is reported to
one or more credit reporting agencies. Your credit history affects
the loan approval decision, as well as the interest rate you
receive. Lenders review your credit report and credit score to
assess your likelihood of repaying the loan. Factors considered
- Your payment history on past and current loans
- The amount and type of outstanding credit
- Credit card balances compared to limits
- Recent new credit or credit inquiries
Capital considerations are your personal net worth (assets
- liabilities or debt) and the amount of down payment you are
making. A positive net worth means your assets (bank balances,
investments, property, automobiles, etc.) are worth more than your
outstanding loan balances. Not only do lenders look for a positive
net worth, but they also expect you to have some "skin in the
game," so your ability to make a down payment is determined.
Character is a subjective determination of the borrower's
trustworthiness to repay the loan. Lenders assess your character
based on your job stability, profession, relationship with the
bank, and other factors.