What do lenders look for besides your credit score?

Your credit score is the most important factor most lenders use when approving a loan. But other financial factors are also important.

Lenders typically take income, current debt and employment into account. Some lenders make credit decisions based on your broader financial profile and history.

What do lenders look for when approving loans?

What do lenders see on your credit report and financial information? Lenders tend to use the following factors when deciding whether to approve your application.

Income and employment history

Employment and income verification are important because money comes in to cover loan payments. When borrowing online, it is also necessary to protect the lender (and the borrower) against identity theft.

Income verification typically means providing pay stubs or a W-2. If you are self-employed, income verification may involve providing the lender with copies of recent years’ income tax returns.

Why lenders care: Lenders want to confirm that you have sufficient income to repay the loan.

Banking relationships

A lender may want to review your bank statements to check your cash flow. An existing relationship with a bank can increase your chances of approval, especially if you borrow from that bank. Lenders also consider mortgages and other active loans during the approval process.

If you plan to take out a loan secured by a certificate of deposit, the lender will want to see proof of the balance in that account.

And of course, lenders want to know that you have a bank account where you can deposit money and make payments.

Why lenders care: Lenders want to see that you have other resources to pay off your loan if you encounter financial challenges, such as a healthy savings account.

Debt-income ratio

In addition to your income, a lender will look at your debt-to-income ratio, or DTI. Your DTI is the percentage of your pre-tax income that goes toward paying debts.

Ideally, your DTI should be lower than 36 percent even after you add the payment for your new loan. However, some lenders accept DTIs up to 50 percent.

Lenders check for mortgage or rent payments, minimum credit card payments, and auto, personal, and student loans.

Why lenders care: Your DTI is the main way a lender determines whether you will have enough money in your monthly income to pay off a loan. If you have too much debt compared to your income, you will not qualify for a loan.

Liquid assets

Lenders don’t always take liquid assets into account, but you may be able to take them with you as proof of your ability to make payments. If necessary, you can quickly sell stocks, government bonds and money market accounts.

This means that you can also qualify for a loan without a high income or a low DTI.

Liquid assets can also be useful if you do not have a regular source of income, for example as a handyman or freelancer. They can cover the costs of a loan if your income decreases. If you have them, you can get a more competitive rate.

Why lenders care: Cash is a way for lenders to confirm that you can pay your loan if you lose your job or experience another major financial setback.

Security

Some types of loans, such as car loans and mortgage loans, require collateral. If you do not pay your loan, the lender can take the collateral you use. In other words, you are putting your property at risk.

If you choose a collateralized loan, also called a secured loan, your interest rate will likely be lower than other loans and credit cards. Secured loans pose less risk to the lender and more risk to you if you default.

Why lenders care: Lenders care about their ability to recoup losses if you default.

Joint borrowers or co-signers

Some lenders allow you to apply as a joint borrower with someone else. When you do this, both you and your co-borrower are jointly responsible for the loan. You also share the loan funds, so joint borrowers typically have shared finances.

Some lenders let you add a cosigner instead. Your cosigner is responsible if you cannot pay, but he or she cannot use the borrowed money.

This is especially useful if you have a limited credit history or a bad credit score. If you take out the loan with someone who is in a better financial situation, the lender may be able to give you a better interest rate. You may be able to avoid a bad credit loan.

Why lenders concern: If you have a creditworthy co-borrower or co-signer, a lender may be more willing to approve your application. That’s because more than one person is financially responsible for the repayment.

Education

The US Bureau of Labor Statistics (BLS) reports that a person’s income and job stability increase significantly with education level. This allows lenders to take your education into account when applying.

It’s rare to find, but there are options. Lenders like Upstart offer relatively competitive rates and take your education into account.

Again, it’s unusual. Lenders may see it as part of the bigger picture, but your education may not be the deciding factor in approval.

Why lenders care: Some lenders believe that information such as college degrees or field of study indicates that an applicant is less likely to default. Statistically, certain applicants have a greater chance of securing a permanent job or income based on their degree.

The bottom line

Your chances of being approved for a loan depend on several factors. Consider the full scope of your financial situation before choosing a lender or applying. It’s usually a good idea to review your credit report, compare personal loan interest rates, and pay off your other debts before applying.