Are you strapped for cash? On those times wherein you are in a financial crunch, a loan can be of big help to sustain cash flow or gain access to funds for emergency expenses. In an ideal world, you can simply send your application and then get approved for the loan right away. But it does not always work that way. You need to meet certain eligibility requirements that had been set by the lender previously so that you can get your cash.
What makes this challenging is that not all lenders are the same. Some might be more lenient requirements while others require you to meet a specific credit score before you can qualify. Hence, it pays to do your research so you can save time when sending your application and to ensure that you can get cash when you need it most.
In this guide, you will learn more about the different factors you need to consider when applying for a loan. These factors are used by lenders to weigh in on your application and determine if you are qualified. If you can tick these items off, then you increase your chances of approval.
1. Credit history
Whenever you apply for any kind of loan, you will go through the process of credit application. This step is when they evaluate your ability to pay the loan amount requested. One of the most important factors that lenders will evaluate is your credit history. This is one of the things you need to check, too, if you want to see if you are eligible for a loan.
Your credit history refers to more than just your credit score. A lot of borrowers have this false notion that their credit score is the make-or-break factor that can impact their approval. While it is an important factor, some lenders put more weight on your credit history. In fact, credit score is just one aspect of your credit history.
Why do lenders look into your credit history? They want to be able to determine how you handle your finances and they want to make sure there are no serious dings in your financial ability. It is one of the best ways to determine if you are a trustworthy applicant. Your credit history will reflect on your overall financial status. From there, lenders will delve deeper into other factors that will help them determine if you are eligible for a loan.
2. Income or Salary
For obvious reasons, lenders will ask you to provide proof of income or your salary. No loan application will be missing this particular type of loan requirement, except for special types of loans for people with low to no income.
When asked to provide proof of income, you will be asked to present documents over the past few months (such as pay slip for the past 3 to 6 months). The purpose of this documentation is to show proof of steady income. Lenders want to be reassured that you have the ability to meet the minimum monthly payment set for the loan you are applying to. With a steady income, you will have a source of fund to use for making payments.
Providing a proof of income is not enough, though. Lenders will require a minimum income requirement before you can apply, especially if you want to apply for a larger loan amount. The larger the amount you are borrowing, the higher the monthly payments will be. Lenders require that you belong to a higher income level in order to be eligible for the loan.
3. Credit score
Credit score is an important factor that you need to check if you want to become eligible for a loan. It determines whether you can get a loan and the interest that you have to pay. Your credit score is determined based on numerous factors such as the amount of debt you owe, missed payments, loan defaults, or any other information that relate to your financial activity. A poor credit score reflects on a poor financial health, too. Therefore, it goes without saying that you should strive to obtain a high credit score.
However, credit score is an important financial tool that can be used not only to make you eligible for loans. It can also be your ticket to get better premiums on your insurance or to be chosen by a landlord on an apartment that is up for rent. It is an integral part of an individual’s financial life. This is a fruit of your actions and those actions can impact your financial life (and decisions) in the future.
Make sure you check your credit score regularly. Get a copy of your credit report to make sure there are no errors that can bring your score down.
4. Debt-to-income ratio
Another important factor that you must check for loan eligibility is the debt-to-income (DTI) ratio. It is expressed in percentage and refers to the amount of your gross monthly income that is paid towards your total monthly debt. The recurring monthly obligations can include your payments for auto loan, mortgage, and student loans, to name a few. The point is that these are fixed monthly payments over a given period of time.
Lenders will evaluate your debt-to-income ratio to determine your capacity to pay. Some borrowers might be able to meet the income requirement for the loan but when you take into account their DTI ratio, and then it leaves them with a small amount of money to live off of for the remainder of the month. This explains why it is important to maintain a good DTI ratio if you want to be eligible for a loan.
What is the ideal debt-to-income ratio? It varies according to the lender’s eligibility criteria. For most lenders, a range of 28 to 43 percent is a good range. However, if you want to secure your loan application approval, then you must strive to keep it lower than 36 percent.
This particular criterion for loan eligibility will vary from one lender to another. Some lenders are strict about having employment when you apply for a loan while others are not as long as you can provide source of income. Therefore, you need to check with your lender first before you send in your application to suit your current employment status and your financial viability.
If you apply for a loan that has an employment requirement, you can either work full-time or part-time. However, you need to make sure that you meet the income requirement for the amount of loan you wish to borrow. You can also get approved for a loan if you are self-employed; but your options might be few and limited as compared to those with full-time employment or those employed traditionally.
For the unemployed ones, do not lose hope because you can still qualify for a loan. There are several types of loans available for those with no employment but receives benefits as their source of income. This might not be sufficient, though, as some lenders will require you to demonstrate your ability to pay.
6. Loan security
The security of the loan refers to the presence (or lack thereof) of collateral. The need for collateral will vary from one lender to another (or from one borrower to another). This will be assessed by the loan personnel upon evaluation of your application and your financial qualifications.
For your guidance, there is a significant difference between secured and unsecured loans. First off, a secured loan is any type of loan that requires you to provide collateral. This collateral should be any item of value that will be repossessed by the lender in the event that you default on your loan. The value of the item must be at par or higher than the amount that you owe the lender. With the collateral, you ‘secure’ the loan because the lender is protected from any losses. The collateral is often required from borrowers with low credit score or poor credit history (such as those considered risky borrowers).
On the other hand, an unsecured loan is any type of loan that does not require collateral. Since there is no collateral attached, the lender will look at your credit score as the sole deciding factor for your loan approval. If you have a good credit score, or your credit score meets the minimum requirement set by the lender, and you meet any other criteria, then you won’t be asked to provide collateral.
Your personal and financial assets are another area to check if you want to know your loan eligibility. This is different to the collateral that is required on your loan application (for those with low credit scores). It can include any of the documentations that can be presented to the lender by the time of the application, such as the income tax return, business or personal financial statements, or any proof of your financial capability. The presence, or lack thereof, of these documents is going to have an impact on your loan application relative to your ability to meet other criteria.
Do you have other existing debts? How much money do you owe? You might find yourself being asked these questions by the lender upon submitting your loan application. There is a reason why you are asked if you have any other existing debts – the lender wants to make sure if you are able to pay off this new loan along with any other debts.
This is in relation to the debt-to-income ratio that is mentioned above; however, that one takes into account all other fixed monthly payments and not just debts. In this particular criterion, lenders will evaluate closely your existing debts and the interest rates that go with that. Debts can refer to not just loans but also credit cards or store cards. When you have too many of these, then it could hurt your chances of being approved for the loan.
9. Cash flow history
How much cash do you have in the bank? Can you easily liquidate these funds? Your ability to access cash is another important factor that will be evaluated when you are assessed for loan eligibility.
This explains why you will be asked to provide proof of monthly income and financial statements when you submit your loan application. Lenders want to make sure there is sufficient amount of cash flow that you have access to on a monthly basis. When there is good cash flow, then you won’t have any problem meeting your monthly payment obligations for the loan. On the other hand, when cash flow is not good, then it could put your loan application in jeopardy.
10. Loan amount
Last but definitely not the least; the loan amount you are applying for is another factor that will be looked into by lenders when evaluating your application. It is important to be realistic about the loan amount you are requesting for in relation to your credit history and the purpose of the loan.
Depending on your qualification, you can get approved for the loan amount you requested for based on two potential scenarios. If you have a high credit score, you could qualify for a loan with a large amount at a favorable interest rate. On the other hand, if you have a low credit score, you can only qualify for a given amount and often with a high interest rate. If you do not want to end up paying a large amount of interest or be in a substantial amount of debt, borrow only what you need and what you can afford to repay.
The bottom line is that no lender can guarantee approval for your loan. Every borrower is unique and every lender has its unique set of eligibility criteria. These factors add up to making every loan application process challenging. Make sure to compare your loan options so that you can give yourself the best chance of getting approved.
With the help of an online loan broker, you can simplify the procedure and boost your chances of getting the loan. With a service like Money Pig, you can narrow down your options for lenders that offer the specific type of loan you are looking for and the criteria for eligibility that you are able to meet. Since Money Pig is partnered with a pool of legitimate UK lenders, you can rest assured that you will be treated fairly by the lender you are working with for a rate that is most suitable based on your credit standing.
Frequently Asked Questions on Loan Eligibility Checker
Qualifying for a loan is easier now than ever before because most lenders are now available online. While it makes it easy to process your loan application and get approval, it does not guarantee that you will be approved for the loan every time you apply for one. It is important to do your research beforehand and gather the information you need to increase your chances of getting approved.
Below are some of the most frequently asked questions about becoming eligible for a loan. Take time to learn a thing or two that can boost your chances of getting the loan you want.
- How do I know if I qualify for a loan?
- What does eligible for a loan mean?
- How does a lender determine if you qualify for a loan?
- How is loan amount calculated?
- How to qualify for a personal loan?
- What is the minimum salary required for a loan?
- Will I be eligible for a personal loan even if I have bad credit?
- What questions might a lender ask you before giving you a loan?
- Why would a loan application be rejected?
- What is the best time to apply for a loan?
- What is the difference between a good loan and a bad loan?
- Is it better to apply online or in person for a loan?
- How does Money Pig help increase my chances of getting approved for a loan?
How do I know if I qualify for a loan?
Each lender is unique. They impose different sets of criteria to evaluate your ability to qualify for a loan. It is your responsibility to research the eligibility requirements set by a lender beforehand to ensure that you qualify for it.
What does eligible for a loan mean?
Your loan eligibility refers to your ability to meet all (or most) of the criteria set by your lender. They will use a number of factors such as your credit score, credit history, income, employment, and age upon evaluation. If you meet these criteria, then you are considered eligible for the loan.
How does a lender determine if you qualify for a loan?
It will depend on the eligibility requirements set by the lender. Again, this will vary from one lender to another. In fact, it could vary based on the type of loan you wish to apply for.
How is loan amount calculated?
Each lender will apply a different mathematical formula that is unique to them. They will use the eligibility criteria that had been previously set to determine the actual amount that a borrower qualifies for. They will also be using that same formula to determine the interest rate on borrower applications that are approved.
How to qualify for a personal loan?
To qualify for a personal loan, you need to meet the minimum eligibility requirements set by a lender for this particular type of loan. This information is readily available from the lender’s website or through an online loan broker.
What is the minimum salary required for a loan?
The minimum income requirement for a loan will vary depending on 1) the lender’s criteria, 2) type of loan, and 3) the amount you want to borrow. Make sure to double check these information before you send in your application so you know how much to borrow.
Will I be eligible for a personal loan even if I have bad credit?
Yes. There are plenty of lenders in the UK that provide personal loans for bad credit. Even if your credit score is less than perfect, you can still qualify for a loan. However, you might need to pay a higher interest rate or attach collateral to the loan in order to become eligible.
What questions might a lender ask you before giving you a loan?
There are many questions that a lender might ask that will be in reference to your financial capacity and your ability to repay the loan. The most important thing to remember is to answer these questions honestly.
Why would a loan application be rejected?
There are many reasons why a lender might reject your loan application. One of the most important reasons, though, is that you are unable to demonstrate your ability to repay the loan. It can be either you do not earn enough or they are unable to verify your income source. Make sure you provide adequate documentation to support your income or employment.
What is the best time to apply for a loan?
There is no such thing as the best time to apply for a loan. You can apply any time you want and get approved as long as you meet the eligibility criteria.
What is the difference between a good loan and a bad loan?
The difference between a good and a bad loan will be determined based on how it impacts your credit in the future. While lenders evaluate your current credit standing before they approve your loan, it is important to look at how that loan could impact your financial health in the future.
Is it better to apply online or in person for a loan?
Your ability to get approved for a loan will not be determined by whether or not you submit your loan application online or in person. However, you can take advantage of online loan applications to speed up the process.
How does Money Pig help increase my chances of getting approved for a loan?
Money Pig matches your needs and financial qualification to a pool of lenders in the UK. By matching you with the right lender, it automatically increases your chances of getting approved for a loan. However, you need to double check the eligibility requirements to ensure that you satisfy them all.