Applying for a loan these days could not be easier, everything is done online. All our banking can be done online now as well. You can pay bills, transfer money, even pay in cheques using a mobile application.
Cheques? When was the last time anyone used a cheque?
The fact is with most things financial having moved online, including applying for a loan, the application processes have been streamlined, and the results, approval or rejection are quicker.
However, in order to speed up the loan process, lenders need to gather very specific information, and be able to make their decision quickly.
So what is that very specific information?
Income and Expenses = Affordability
Affordability is one of the two main factors in determining to approve or reject a loan.
Lenders ask you to complete online, or if on the phone, state your income and expenses. This allows them to see if you can afford to repay the loan or not.
In the past some lenders were accused and found to not having completed affordability checks, which caused a high default rate, and also fines by the financial regulators.
Of course lenders may not just take your word on what you earn and what your monthly expenses are, they can request documentation, or even bank statements.
What the lender is looking at when determining affordability to repay a loan can be various ratios. The ration of all your total monthly bills to your income, and also all your other debts/loans against your monthly income.
High ratios can show an affordability issue, and could be cause to reject a loan application.
But let’s not get too ahead of ourselves.
Credit scores are a numerical assignment based on factors that is used to determine your ability to repay a loan. Actually is not so much ability to repay a loan, as it is how you have paid your bills and debts in the past.
And credit scores weigh heavily as to if a loan application is approved or rejected.
Credit scores are currently based on the following factors:
- Payment history: How you have paid your accounts in the past, and this makes up 35% of your credit score.
- How much you owe: How in debt are you, and this makes up 30% of your credit score.
- How long you have been active with credit: Your length of credit history, which makes up 15% of your credit score.
- New credit and inquiries: How often do you apply for credit, which makes up 10% of yur credit score. Too many credit applications in a short period of time reduces your credit score.
- The types of credit you have: This makes up 10% of your credit score. Having a mortgage is good, having payday loans, and some catalogues, can reduce your credit score.
Lenders need to weigh these two main factors, affordability and credit score in determining to grant a loan.
Even if you can show you can afford to repay a loan, if you have a low credit score, a lender could condition the loan requiring you to have a guarantor.
Having a high or good credit score, but not being able to show you can afford to repay a loan, could also be reason to not grant the loan.