Get Loan Ready!
The following was written by Jeremy of CreditSpark.ca. So you want to get a loan but don’t want to see the big red “DENIED” stamp on your file? Many people are in the same situation. Having the ability to borrow can make a huge difference on their finances and walking blindly into loan applications without a little bit of background information can be a costly mistake. Knowing how potential lenders look at a loan application can possibly save you thousands extra in interest charges.
It is a common mis-conception that a lender only looks at your credit score. Your credit score is an extremely important piece of your application but certainly not the only thing a lender will look at. Before applying, you should get a free copy of your credit history from TransUnion and Equifax. After looking through it, make sure everything is accurate and fix any errors that could negatively impact your score.
If you have a low credit score, don’t have established credit, or have been through a Bankruptcy or a Consumer Proposal, getting started building your credit should be your first priority. There are a couple different options available to build credit. First, you could get a secured credit card. For this, you essentially put up a security deposit which acts as your credit limit on the card. Another option would be a CreditSpark Savings Loan. With a Savings Loan, the cash from the loan goes to purchase you a GIC investment. Then, with each payment, you build up your credit and your savings, because at the end of the term, you get the GIC and its interest. This is a great option because there are no upfront costs associated with starting a Savings Loan.
If you have an established credit history and everything is correct on your credit report, the next item that lenders will look at is your character. They want to make sure that you are willing to repay the loan. They will look at training, financial competency, experience, and plans for your future. The stronger and more grounded you are as a potential borrower will help convince the lender to loan you money.
Capacity is another important item. If the lender was to lend you money, they want to ensure that they will get paid on time so they are looking at your capacity to repay. This really means they are looking at what your income is. If you have a good stable salaried job that you have had for a while, this will look much better than a commissioned sales person who just started a new job.
The old adage, ‘it takes money to make money’ also applies to loans. The more money you have, the better the chance you will have to get a loan. The lender will look at your situation and say “what happens if you don’t repay?”. If they need to take legal action they will be more likely to get their loan back if you have substantial assets and capital. The less you have, the less the lender would be able to collect if you default, which makes the loan riskier and less appealing to a lender.
Collateral ties in with Capital. A lender is going to be very interested in what collateral you have and are putting up for the loan. For example, if you are applying for a mortgage it will make a difference for the lender if you are putting 5% down as a down payment or if you are putting 80% down as a down payment. If you only have put down 5% and default there is a much larger chance that the lender will not be able to recover all their loan and costs if they need to sell off the asset as opposed to an asset with 80% down. The more collateral you put up for a loan, the less risk the lender has, which makes it a better chance you will get the loan. Lenders will also look at the type of collateral too. They want to know if it is depreciating, or going down in value, like a car or electronics, or generally appreciating like property or a house because that changes the risk of the loan.
Finally, the conditions are the last item that a lender is going to look at. Unfortunately, this is something that you probably won’t have too much control over. For example, the lender is going to look at the overall economy and the economic conditions that your area is facing. If there is a recession or tight credit, it may make it more difficult for your loan to be approved. As a part of conditions, a lender is going to look at what you are using the loan for. A car loan to get to work and back will look very different from a loan to buy the latest big screen TV.
By taking a look at these items before you apply, you can help to make your loan application the strongest it could possibly be to help you get approved. The key take away from this is to do your homework on yourself and your application to see where you stand in the eyes of a lender. Remember, if you do happen to get turned down for a loan, you are not the first to have had that happen, so don’t take it personally. There are many different lenders out there catering to different types of clients, so there is probably one out there for you.
Jeremy is the President of CreditSpark Financial, an alternative lender. CreditSpark helps clients establish and build their credit while saving to be able to qualify for loans and mortgages.