How Credit Scores Affect Loan Approval

Lenders consider a person’s credit score when they apply for a personal loan. How Credit Scores Affect Loan Approval They use this information to determine how likely the borrower is to repay the funds provided. The credit history includes information about the borrower’s prior payment history.

A high score is more likely to be approved and get a lower interest rate. Individuals with a score under 670 may find it challenging to find a lender willing to provide the necessary funds. If a lender is willing to work with them, the rate will probably be very high. Men and women should consider using a loan calculator to better understand what they can expect when applying for a personal loan or any loan.

Why a Credit Score is Important

How Credit Scores Affect Loan Approval A credit score shows lenders that the borrower understands how to handle debt and will make payments as agreed. Various scoring models exist, but all consider credit utilization, payment history, and account age. Lenders look at this information to see how the borrower’s finances have looked over the previous years.

FICO Score and VantageScore

The FICO score is a model created by the Fair Isaac Corporation. Scores with this model range from 300 to 850, with 300 being the lowest score and 850 the highest. The VantageScore is another model commonly used by lenders when evaluating potential loan applicants. The VantageScore ranges from 300 to 830. However, the models rank categories differently. For example, FICO gives less weight to payment history and more weight to amounts owed. Each lender determines which model it will use when evaluating loan applicants.

Boosting the Credit Score

Applicants may take steps to boost their credit scores before applying for loans. Raising a credit score takes time; it is not a process that can be completed overnight. Applicants should remember this and begin working to improve their credit scores months before they wish to apply for a loan.

The best way to improve a credit score is to minimize the credit used. When a person pays down debts, their credit utilization declines. How Credit Scores Affect Loan Approval Credit utilization is a high percentage of any person’s credit score, whether the FICO or VantageScore model is used.

Borrowers must make all payments on time to improve their credit scores. Late payments quickly drop a person’s score. Set the payments on auto-pay to ensure none are missed.

Don’t open any accounts when trying to raise your credit score. If a hard check is done, this will appear on the credit report, and the lender will see it when they check the credit score. They may worry that the borrower is taking on more than they can repay.

Additional Factors That Play a Role in Loan Eligibility

Lenders consider other factors when determining a borrower’s eligibility for a loan, such as this individual’s financial health and portfolio. Most lenders have minimum financial requirements for loan approval, but not all share this information.

Lenders will look at a borrower’s income to ensure they have the funds to repay the loan each month as agreed. The borrower must show proof of this income. In addition, they want to ensure that the applicant is employed and will require evidence of this employment. The lender will then look at the applicant’s debt-to-income ratio. Most lenders look for a debt-to-income ratio at or below 36%. Although a lender might provide funds if the debt-to-income ratio exceeds this amount, the borrower will pay a higher interest rate.

Every person should check their credit score before applying for a loan. If the credit score is low, consider raising it before applying. Doing so will increase the odds of being approved, which is why the individual applied for the loan initially.