From A Lender’s Perspective: The Story Your Loan Application Tells
They say every picture tells a story—and it’s true. It may sound silly, but every loan application also tells a story. When you apply for a loan, it’s up to the lender to interpret your story and predict its’ outcome. A lender evaluates an application with one key question in mind— “Will the borrower be able to pay us back?” To answer this question, they read your story. Each component of the application is a chapter of your story. Each chapter reveals more of the story and brings the reader closer to the story’s ending. Different lenders will learn more from different chapters of your story, and that chapter may reveal more to one lender than to another. When you apply for a loan, here are the chapters of your story that a lender will evaluate.
Your credit profile
Your credit report and credit score are the biggest and clearest indicators of your financial health. A good credit score indicates your ability to meet your financial obligations (i.e. pay your bills). A poor or rapidly declining credit score indicates that something is amiss. Your credit score acts as a summary of your full credit report. Your credit report details your history as a borrower. It is used by lenders to assess how risky or safe it is to lend to you.
Your bank account
Many lenders find it helpful to obtain a snapshot of your bank account. Your bank account will show a lender what you’re bringing in each month as well as what’s going out. Lenders find it helpful to see your expenses in addition to all forms of income. This gives them a sense of your regular financial obligations and determine your ability to manage another payment. This means a higher income won’t necessarily improve your chances of being approved for a loan. It all depends on your income offsets your expenses.
Your bank account can also offer additional insight into the current state of your financial situation beyond what a lender may see in your credit report. While having a clean credit report and consistently making your payments is excellent, your bank account may reveal you’re in danger of overextending yourself. Adding one more payment could be all it takes to cause you to be unable to meet your other financial obligations.
Lenders may also want to examine your employment history to determine how steady the income they observed in your bank account is. Your employment status and history can provide further insight into the state of your financial profile by providing context into high or low points.
Your debt history can also reveal more to lenders about your ability to handle debt. If you have a history of repaying all your debts on time, lenders will see this as a sign of responsibility. On the flip side, if you have several outstanding debts already, lenders may not be keen on giving you another loan to contend with.
What’s important to note is your story is never finished. You have the power to change it and keep writing it. Your history is a work in progress and with healthy money management habits and diligence there is still time for a positive outcome.