How Lenders Evaluate Your Loan Application

When you apply for a loan, whether for business or personal use, lenders will weigh a number of factors to try and determine if you are able and likely to repay the debt.

There are three primary considerations that affect a lender's decision to approve or decline your loan request:

• Capacity - What is your ability to repay the loan? Do you have a steady job or another source of income? How many other loan payments do you have, and what impact do these payments have on your monthly income? Is your income sufficient to cover your contractual obligations, as well as those other day-to-day expenses?
• Character - Have you used credit before? Do you pay your bills on time? Do you have a good credit history?
• Collateral/Capital - Do you have other assets which could act as a secondary source of repayment, such as a savings account, car, or certificate of deposit?

Most lenders pull a credit bureau report on all applicants to help them analyze a borrower's application. Understanding how your credit data might be interpreted may give you a chance to improve your credit worthiness from a lender's viewpoint.

The three major credit bureaus (Experian, Equifax and Trans Union) track your credit activities from data supplied from your creditors. The information disclosed in the report produces a credit bureau "score" that is reflective of your overall credit standing. The better you maintain your credit, the higher the score. Poor credit will lower the score. It's important that you occasionally review your credit report in order to determine if the information is correct. Obtain a copy of your credit report.

There are a number of factors that can affect the score you are assigned. Some of these include how much debt you have incurred, the number of accounts with balances, age of debt, or delinquent payments. For example, if you have several open credit cards that you don't use but with high credit limits, lenders will note that with a lot of available credit, you could run the risk of overextending yourself in the future, even if you have not done so in the past. Consider closing those accounts you don't need or plan to use.

When you authorize a lender, employer or other business to check your credit report, an "inquiry" is added to the report, and usually stays on your credit report for two years. Certain types of inquiries (requests for your credit report) do not affect your credit score. Requesting your own credit report does not affect your score. It also does not count "promotional inquiry" requests made by lenders in order to make a "pre-approved" credit offer, or "account review inquiry" requests made by lenders to review your account with them. Inquiries for employment purposes are not counted.

Information on your account is updated continuously. However, negative information, including non-payments or late payments, stays on your report for seven years. Bankruptcies stay on your report for 10 years.

Responsible credit use while you are younger can build a strong credit history that will help you get your adult life off to a strong start when you set out on your own.

If you manage credit well, it can help you get the things you want, such as an education, a home or a car. Otherwise, it can affect your ability to obtain future credit, or the credit you do receive could cost you more.

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