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What do lenders look at when you apply for a loan?
When you’re thinking about taking out a loan, it’s a good idea to take steps to make sure you’re in the best position to get accepted.
A good way to do this is by thinking about the things lenders will look at when you apply to take out a loan with them. By doing this, you can be one step ahead of the game and make the right choice about the loan that suits your situation best.
Your credit history
This is the most important factor when you apply for a personal loan. Your credit history shows lenders information about how you’ve managed credit in the past, as well as:
- Your Electoral Roll information
- Your current and previous addresses
- Any missed payments, CCJs, bankruptcies or debt solutions in your name within the past six years
- Any credit agreements you have open, including credit cards, loans and mortgages
- Information about your current account and overdraft (if you have one)
- Anyone financially linked to you.
When you apply for a loan, the lender will see this information. Your current credit agreements, any missed payments or legal action taken against you and your financial associations will all play a part in their decision as to whether they lend to you or not.
For personal loans – also known as unsecured loans - with the best rates, you’ll need to have a good credit history with no missed payments. But you may have more luck applying for a secured loan (also known as homeowner loans) if you have a less-than-perfect credit history. This is because your home is used as security if you can’t repay what you borrow – so be sure you can afford the repayments if you want to avoid the risk of your home being repossessed.
Your income and outgoings
Another important fact taken into consideration by lenders is how much money you have coming in and how much you’re spending each month.
The reason for this is that your lender wants to make sure you have the room in your budget to make repayments on a loan. This helps to prevent you from taking out a loan that you can’t afford to repay.
Lenders will look at your income whether you apply for a personal or homeowner loan. But as a homeowner loan is often for a much higher amount, the lender usually looks at your income and outgoings in more detail. It’s normal to expect at least three months’ worth of your bank statements to be looked at by the lender, where they may only look at one month for a personal loan.
Because of this, it’s a good idea to rein in your spending before you apply for a loan. Not only could this improve your chances of being accepted, but cutting the cloth also puts you in a better position to make your repayments more comfortably.
Your equity if you’re a homeowner
If it’s a homeowner loan you’re looking for, the lender will look at how much equity you have in your home. Your equity is the amount of the property you actually own. To work out your equity, you should:
1. Find out how much your home is worth (you can use the Land Registry website or Rightmove’s house price calculator if you don’t know).
2. Find out how much money you owe on your mortgage.
3. Subtract how much you owe on your mortgage from how much your home is currently worth.
4. The value you’re left with is how much equity you have.
The more of your home you own – in other words, the higher the equity – the better deals you should be able to access, and the more money you’ll probably be able to borrow. This is because there is less risk involved for the lender as you own a larger chunk of your home.
If you owe more than 80 or 90% of your home’s value to your mortgage provider, the loan lender may view this as more of a risk if you fall behind on your repayments. This is due to the fact your mortgage provider would be first in line to be repaid if your home is repossessed, which would leave the loan lender out of pocket. With this amount owed on your mortgage, you may find you’re not able to borrow as much as you’d like.