It’s Not All Credit Scores: Other Things Your Lender Might Be Looking At

When applying for a credit card, it’s relatively easy to get a seal of approval if your  FICO score meets or exceeds the lender’s benchmark.

But that’s not necessarily the case with other types of loans, such as small business loans, personal loans, or even some car loans and mortgages. In order to assume the risk you may bring to the table, some lenders might scrutinize a number of factors to determine if you’re a good fit.

The five C’s of credit

Lenders may also weigh another set of factors called the five C’s, or as Investopedia puts it, “five characteristics of the borrower, [that attempt] to gauge the chance of default.”

1. Character

Even if your credit score is through the roof, potential lenders may be interested in you personally as well as your credit profile, particularly for loans made to small businesses. Says the Minority Business Development Agency:

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan …

Subjective opinions will normally be less important to most lenders than the things represented by the other C’s, but depending on the type of loan you’re getting, they could still play a role.

2. Capacity

Will you be able to keep up with the monthly payments that accompany the loan? Is your debt ratio (what you owe vs. what you own) below the lender’s acceptable limit?

To answer this question, potential lenders may evaluate your stream of income, both fixed and variable.

When analyzing your income, creditors will more than likely be interested in the duration of your employment to determine the stability of your income. Is there room for growth? Frequent job changes or extended breaks in employment can be a red flag.

Your outstanding debt to the pretax income ratio, also known as the debt-income ratio, can also come up, especially for large loans such as mortgages.

Are you practising sound debt management habits or cutting it close? Excessive late payments, exorbitant outstanding balances, and constant adjustments in credit limits reflect a higher level of risk, and the APR will be assessed accordingly if the loan is approved.

3. Capital

Do you have the funds available to make a down payment and reduce the risk of default?

If you’re making a purchase that requires a down payment, such as a car or a house, having the cash on hand to contribute without completely depleting your reserves is important. The larger your deposit, the lower the loan amount, and the less risk the lender has to assume. In addition, the lender likes to know you have cash reserves. Otherwise, you put yourself at risk of default if you have unexpected expenses.

Mark Twain said it best: “A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain.”

4. Collateral

Are large assets available to help secure the loan?

When a lender loans based on collateral you provide, it’s known as a secured loan. Loans like those used to finance cars and houses are common examples.

Obviously, if you’re borrowing for a house or car, that asset will become the collateral. But there can be instances when a lender will look for additional sources of security in the event you should default. One typical example is with business loans.

5. Conditions

What are the current market conditions, and are your finances stable enough to remit timely payments over the term of the loan?

Wells Fargo notes:

Lenders may want to know how you plan to use the money and will consider the loan’s purpose, such as whether the loan will be used to purchase a vehicle or other property. Other factors, such as environmental and economic conditions, may also be considered.

And one S: Social Media 

If you are seeking credit, be mindful of what you post on social media. As we reported recently, some lenders are mining Facebook, Twitter, and other social media outlets to reach conclusions about creditworthiness. This factor could be especially weighty for applicants who have little or no credit history, according to CNN.

If you’re financially well-established, you might not have to worry about social media when applying for a loan. On the other hand, it’s never a bad idea to be mindful of what you broadcast to the world.

Source: http://www.moneytalksnews.com/how-lenders-evaluate-your-creditworthiness/?all=1