We’ve all been in that situation where we simply need a cash injection. Whether we have had an emergency expense, need to bridge the gap to payday, want to buy a new car or just getaway on a holiday, there are many reasons why we would want to apply for credit. While knowing your credit score and how it’s calculated is a good start to understand what your lender will be looking at when you do apply for credit, there are a lot of other factors that influence the decision on whether you are approved or not. It’s not only the approval that will be influenced by these factors. Your interest rate and the repayment periods offered will also be decided based on the factors used to determine your eligibility.
Does the Type of Finance Matter?
The kind of finance you apply for definitely determines whether you will be eligible or not, as well as the costs of the finance overall. A car or home loan which involves the purchasing of an asset that the lender can recover if you default on the loan will have lower interest rates and different lending criteria to that of an unsecured personal loan, where the money the lender pays out might not be used for an asset purchase.
The qualifying criteria for determining payday loans UK might be even lower, which means the costs of this sort of loan can vary between lenders. However, using a site like paydayuk.co.uk, a payday loan broker, to find and compare the costs of these loans will mean you’ll find the best offer. They can put you in touch with a panel of lenders that payout in as little as 15 minutes with no credit check, which means they can be used for emergency expenses.
The Value of What You’re Buying
One of the biggest determining factors if you’re buying an asset like a car is the value of the asset you’re buying. If you find yourself unable to make the monthly payments on a loan you’ve taken out and thereby default on the loan, then the first step would be for the bank or lender to try and recover the asset that was purchased. The value of this asset determines the amount of risk the lender is undertaking and therefore will determine what sort of loan you’re able to get. Lenders might want the asset that you’re applying for to be appraised, or if you’re purchasing a car, they’ll use the book value to determine if the requested amount matches the value of the asset.
Your Income and Sources of Income
Naturally, banks or lenders are going to want to know if you can afford to pay back the loan and your income can cover the installments you’re going to be expected to pay. This means not only confirming your income and where it comes from but also determining how secure that income is. Usually, they’ll do this by asking for a few months’ salary payslips or if you’re self-employed, they might request bank statements. They’ll also want to make sure you have a good debt-to-income ratio before they make the decision to grant the loan.
If you’re offering a deposit when you take a loan, this deposit amount will be deducted from the principal loan amount, bringing down the amount borrowed and thereby making the repayments less and the chance of being approved for finance better.
Your Existing Debt
The other half of the debt-to-income ratio is your debt. Lenders will look at the debt you currently have and using a formula determine what percentage of your income it is. The debt to income ratio is determined by taking your total monthly debt, dividing it by your total monthly income, and multiplying it by 100. This will give you a percentage, which is your debt-to-income ratio.
The type of finance you’re looking for will determine what the lender would like to see this being, but ideally not above around 40 to 45 percent. If you are a high-income earner and you service all your debt every month, you might still be granted a loan if your debt to income ratio is higher than this, but for bigger loans like home loans, you’re definitely going to want to get this as low as possible.
Your Savings and Investment Balances
Your savings and investment portfolio make up part of the factors the bank will look at when you apply for finance, particularly if you’re retired. It can be used as loan collateral and is important if you’re looking to take out a secured loan. If you don’t need to offer collateral, the loan is unsecured and will likely be for smaller amounts or attract much higher interest rates.
A good example of this can be found in home loans. If you apply for a home loan, the bank will almost never give you a loan with a value higher than that of the property itself, as they want to make sure that should you default, they can recover their initial loan amount. The home itself acts as collateral when you apply for a home loan.
Your History of Paying Your Bills
Another big determining factor in your application for finance is your payment history on other debt and loans you’ve had in the past. If you have a good history of making all your payments on time, then you’re going to have a good credit history and lenders will be more willing to grant you a loan. This is one of the biggest determining factors when you do apply for finance because it demonstrates what kind of lender you are. If you have previously defaulted on a loan, then this will be recorded on your credit profile and will make getting finance more difficult. In many cases, you will have to wait a number of years before you are able to re-apply.
Your Credit Score
Your credit score is a score given to you by a credit bureau and is a number score between 300 and 850. It’s essentially a look at your credit portfolio, how good you are at making monthly payments, and how often you revolve credit like credit cards or rely too much on debt during the course of the month. Your credit score will change all the time as you use your credit cards, apply for new credit, or payback existing credit. It looks at both short- and long-term debt to determine how well you use credit and if you are a low or high credit risk. A good credit score is above 680 and excellent is above 740. If your credit score is below 619, it is considered poor.
This isn’t an exhaustive list of things that will be used to determine your eligibility for credit, but it forms a good base of what you can expect to be looked at the next time you apply for credit. Since you never know when you’re going to need access to additional funds for the next disaster, having a healthy credit rating and not using credit when you don’t need it are both important. Being a responsible borrower means that banks and lenders are more likely to approve your credit applications and offer more favorable interest rates when you do apply. You know what you can and can’t afford to pay back, so use this knowledge to determine how you can use credit responsibly.