You hear it all the time: “There’s no way you’re going to get a personal loan with bad credit.” Other naysayers take it a step further: “Even if you manage to get a loan, the interest rate is going to be way too high.” It seems the conventional wisdom states that a high credit score is the Holy Grail of lending. Without it, there’s no way you can qualify for a loan.
While there is some truth to that, we have funded personal loans for credit scores in the low 500s. Typically a better credit score can often increase a borrower’s chances of acceptance and can mean a lower interest rate. You can learn more about how to get a loan with bad credit by reading our post, How To Get A Loan With Bad Credit.
As a lender, we know it takes more than just a great credit score to qualify for a loan. Read on to find out what other factors are equally – if not more – important.
An Established Credit History
Every person’s credit report starts as a clean slate: no accounts, no history, and no score. That’s right – your credit score doesn’t start at 800 and work its way down, it begins at zero and works its way up. If you have never taken out a credit card, owned a home, or made payments on a car, chances are you have no credit history.
In this case, it’s not your credit score that can disqualify you, it’s that there’s no recorded history of you being a responsible borrower. Many people start to build their credit history through student loans, secured loans, and being added as an authorized user on a parent’s credit card.
Your Monthly Expenses
Also known as your Debt-To-Income Ratio (DTI), this is one of the most critical factors in qualifying for a loan. A lender adds up certain monthly payments for which you are obligated, including credit cards, student loans, rent or mortgage, collections, and car payments. Then they add on what your potential payment will be with your new loan. Your combined monthly payment amount is then compared with your gross monthly income.
Monthly income has to be proven with either pay stubs, bank statements, or tax returns, along with verification of employment for W2 employees (salaried workers). As you might have guessed, income and expenses can pose a unique challenge to self-employed workers who claim a lot of deductions from their income for tax purposes. If a self-employed person can’t prove their income, it makes it harder to get a low Debt-To-Income ratio.
The qualifying DTI range varies between lenders, but somewhere around 50% is typically the max for most personal loans. Lending Club, a popular personal loan lending service, has a DTI of only 30%. If you are considered “highly leveraged,” (more debt than you have income to pay for) you will not qualify for a loan. This is regardless of how high your credit score may be or how responsibly you are making payments on your existing debts. Most personal lenders, including Credit Direct, place a high loan qualification value on your ability to repay your loan.
Use of Funds
Some lenders have a limit on what your borrowed funds can be used for. One of the advantages of a personal loan from Credit Direct is that it is considered a “blanket loan,” meaning it can be used for practically any purpose.
Most lenders do not allow personal loans to be used for college education (i.e., to substitute for a student loan). However, you can take out a personal loan to pay off or consolidate existing student loan debt.
The State In Which You Live
Lending laws are regulated on both the state and the federal level. Some states do not allow certain types of lending, such as payday loans, personal loans, or bridge loans. Lenders also have to be licensed to operate in each state to provide loans. An excellent resource to learn more about federal lending laws is the Consumer Finance Protection Bureau’s website.
Much like your credit history, your payment history is crucial in qualifying for a personal loan. Lenders want to see that you make your payments on time. This is so important that 35% of your FICO score is determined by timely payments. The more timely and consistent your payments, the more a lender is assured that you are going to pay the loan back.
One of the least-known factors that goes into your qualification for a loan is employment history. Like many of the examples above, employment history can help determine if a borrower is responsible, consistent, and therefore, of reasonable lending risk. If you’re a salaried employee, proving employment can be as easy as providing pay stubs or a call to your HR Department.
That said, employment history does not have to mean a track record as a salaried employee with a major corporation. Child support can be used in employment history, as can government benefits or alimony or any other source. The important part is that these sources are verifiable and documented.
As mentioned earlier, self-employed persons can have a more difficult time proving their employment history. Typically, a year’s worth of tax documents – both personal and from your business – are required to demonstrate that your income is derived from your own business.
Employment history has little to do with credit score, but it is an important factor to all lenders in determining your eligibility for a loan.
Credit Direct Looks At The Whole Picture
When you apply for a personal loan with Credit Direct, we take into consideration all the factors that determine a well-qualified borrower. Whether you have bad or good credit, high or low income, credit history or a first-time borrower, our job is to ask, “is this person in a position to pay back this loan?” Apply online at www.creditdirect.com or give us a call at 866-414-4198. Check eligibility in minutes without affecting your credit score.