When you apply for a loan, lenders assess your credit risk based on a number of factors which will include: credit/payment history, income, student loans, and your overall financial situation. On todays show Doug goes over information that will help explain these factors, also known as the 5 Cs, so that you can get a better idea of what lenders look for!
Credit History
Qualifying for the different types of credit hinges largely on your credit history . Your credit report is primarily a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you. While information may vary from one credit reporting agency to another, the credit reports includes the same types of information, such as the names of lenders that have extended credit to you, types of credit you have, your payment history, and more.
Lenders may also use a credit score that is a numeric value (usually between 300 and 850) based on the information contained in your credit report. The credit score serves as an indicator for the lender about risk based on your credit history. Generally, the higher the score, the lower the risk.
Capacity
Lenders need to determine whether you can comfortably manage your payments. Your past income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.
Collateral
Loans, lines of credit, or credit cards you apply for may be secured or unsecured. With a secured product, such as an auto or home equity loan, you pledge something you own as collateral. The value of your collateral will be evaluated, and any existing debt secured by that collateral will be subtracted from the value. The remaining equity will play a factor in the lending decision.
Capital
While your household income is expected to be the primary source of repayment, capital represents the savings, investments, and other assets that can help repay the loan. This can be helpful if you lose your job or experience other setbacks.
Conditions
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.
Podcast: Play in new window | Download
