What Lenders Look For When Loaning You Money
When you’re ready to shop for a car (or house) or any other big-ticket item that requires you to take out a loan, you’ll want to make sure you are prepared so that you can get the best financing deals available. For many borrowers that may mean the lowest interest rate possible with the longest terms. You want the money you borrow to be as affordable—and as easy to pay back—as possible.
Here's what lenders look for when deciding the terms of your loan.
It's important to find a lender who you trust will support you. A partner who will guide you on the best path forward. At Centreville Bank, we support customers and communities in making progress toward their goals using responsible financing solutions. If you are looking for a loan and are unsure whether you would qualify—or if you have questions about your financing needs—reach out to us.
Here's what lenders look for when deciding the terms of your loan.
- Your history of managing borrowed money. To find this information, lenders will pull up your credit report and score. Your credit report and corresponding score tells lenders how likely you are to pay back your loan with them. If you’ve been late on payments, or defaulted on prior loans, your credit report shows it. Typically, a credit score ranges from 300 to 850; the higher the number the better. To get the most affordable financing, you’ll want your score in the 700s or 800s. Of course, those are generalities and lenders will take into consideration other factors, such as:
- Your income and employment history. Basically, can you comfortably afford your monthly payments? And will you have the means to pay back the loan in its entirety? Having a job with a consistent salary goes a long way in proving to lenders that yes, you can make the monthly payments over the long run until the loan is paid off. Perhaps you got into a financial jam in your earlier years and had credit issues. A lender will take into consideration your holistic financial profile. Where you’ve been is important, but where you are now matters too. Lending money is always a risk. But if you have steady income all year long (as opposed to seasonal employment or someone just getting started in their career), lenders will see that as a big plus.
- Your debt-to-income ratio. This ratio compares how much you owe each month to how much you earn. While having a good and steady income can be a big plus in the eye of your lender, high debt may negate that. If you’ve got other loan payments every month (e.g., car, student loan, rent or mortgage, credit cards), lenders may turn you down if your debt-to-income ratio is too high. For example, if you are trying to get qualified for a mortgage, lenders generally prefer a debt-to-income ratio at 35 percent or less.
- To calculate your debt-to-income ratio: add up all your loan payments, including rent or house payment, monthly alimony or child support payments, student, auto and other monthly loan payments, credit card minimum monthly payments, and any other debts. Divide that number by your gross monthly income (pre-tax income). The result is your debt-to-income ratio. The lower that ratio, the more confident lenders will be to loan you money.
- Your collateral (this applies to secured loans). Loans, lines of credit and credit cards may be either secured or unsecured. With a secured loan, you promise to give the bank something you own of value (aka, collateral) if you default on your loan. Common items to pledge as collateral include a car, house, or a savings account. A big advantage to secured loans is they usually feature lower interest rates than unsecured loans.
It's important to find a lender who you trust will support you. A partner who will guide you on the best path forward. At Centreville Bank, we support customers and communities in making progress toward their goals using responsible financing solutions. If you are looking for a loan and are unsure whether you would qualify—or if you have questions about your financing needs—reach out to us.