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Personal loans sometimes have a reputation for harming your finances, but there are situations where taking on this debt can be a positive thing to do — such as covering health bills or unforeseen expenses. The rate at which Brits are borrowing has eased in the past year, but if you are considering a personal loan among other financial options, it’s important to have a realistic idea of how you will pay it back. No matter the type of loan, there are criteria that banks and money lenders use to determine if an applicant can be approved, and they can be stricter when it comes to personal loans as there is no collateral (such as a house or car) to back you up if you default on payment. Your circumstances determine not only if you will be approved but also the amount you can borrow, interest rates and length of payback time. Here are some of the most important factors money lenders will look at.
Your Credit Score
Your credit score is perhaps the biggest single factor a lender will look at. A credit score is determined by elements including your debt, the types of accounts you have and any late payments you have made. The higher your score, the more trustworthy you are in the eye of the lender. You’re entitled to a free credit report each year, and you may find there are ways you can improve your score and subsequently the loan available to you — such as paying off a debt or maintaining credit card payments.
Income And Debt
Your income determines how much you could borrow by displaying your capacity to pay it back. A lender will look at your income as well as the debt you’re responsible for — such as a mortgage or other committed payments — to determine your debt-to-income ratio. This is your total monthly outgoings divided by your income, and lenders use this figure to predict your ability to manage your existing outgoings with a monthly loan payment on top.
Employment History
A history of stable employment indicates that you are more likely to have the necessary income to pay a loan back. Stable in this context means not only earning a consistent income but also staying within an industry or company for reasonable amounts of time. Lenders may need to see pay-slips when considering your application for a personal loan — or a document such as an audited financial statement if you are self-employed.
Repayment History
A key factor in your credit score, lenders will review your repayment history to check for unpaid debts or late payments, which could affect their confidence in your ability to pay a loan back. If you have a history of paying back car and mortgage payments, student loans or other debts on time, this indicates that you are responsible with your debt. Your credit report will show the number of days you have delayed making repayments — while a day or two is generally acceptable, delays of more than a month are a warning sign to money lenders.
Now that you are aware of some of the key factors affecting your chances of being approved for a personal loan, you are better placed to know if applying for one is the right financial choice for you. Let me know if you’ve had a loan before in the comments below.
*Disclaimer – This is a collaborative post with 118 118 Money. This post has been pre-written.