Do you know what creditor thinking before you apply loans?
When you apply for credit cards, personal loans or other loans, the creditor will assess the level of credit risk.When making this assessment, the creditor will take the borrower’s ability to meet its obligations to pay the loan.
The level of risk will determine the interest rate and the cost for the loan to be approve.
Approval of the loan usually depends on this three major factors :-
1) Loan Purpose
– Creditors want to know the purpose of a loan to assess the risks involved. The loans will be matched by borrowings purpose.
If you buy a home, then you will be offered a housing loan and buying a car, you will be offered with the hire purchase loans. For loans for private purposes, will offer personal loans. Purpose and type of loan and whether secured or not will determine the interest rate and term of your loan.
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2) Ability to repay the loan
– The ability to repay the loan is important. Creditors will assess whether you have a surplus cash reserves to meet the new financial commitments.
They also want to confirm that you consistently have a steady income or a steady job. Cash flow position will be evaluated in detail.
The main indicator for assessing the ability of payment is by knowing the ratio of debt to income.
The ratio of debt to earnings shows the amount of monthly repayment of the loan compared to the amount of your monthly net income.
A high ratio indicates a person does not have enough money to cover their monthly expenses.The way to reduce this ratio is to enhance the level of income or reduce your loan commitment.
You are advised not to have a commitment to high debt and using credit cards excessively. This is because it will affect the ratio of debt to earnings and may affect your credit score in the future.
3) Payment History Record
– Previous history payment record or current will be evaluated to identify the borrower. If you have bad track record, the possibility loan approve will be small.
That’s some of basic information about the creditor thinking. Always prepare. And avoid loan shark.