It looks so easy and for every site you look through there are promises of ‘YOU WILL BE APPROVED’. So why do you keep getting turned down without an explanation?
Regardless of whether you approach your bank, lending institution or an online lender etc. there are certain criteria and guidelines that all lenders follow. Many of them have a strict set of guidelines as they only want to attract a ‘targeted’ group with a good to excellent credit score. Other lenders have a more ‘relaxed’ set of guidelines as the clientele base they are willing to lend to require less stringent restrictions in the application process. But, at the end of the day, all lenders still follow a set of basic guidelines.
CREDIT SCORE
Yes, it is all about your credit score. Lenders, whether online or traditional put great emphasis on a person’s credit score. ‘The higher the credit score the lower the risk. An important note when applying online. Lenders will do a soft pull first before they approve your application. This will not affect your score if you are not approved. If your application is approved, some lenders will then do a ‘hard pull’ but this will not affect your score as you have already been approved.
Excellent Credit (720 +) Banks and established lenders prefer to lend money to those with a credit score of 700 and higher. There is very little risk of a missed payment. A person with this credit score has many options available to them when they need extra cash. Better Terms. Better Interest Rates. The amount of money a lender is willing to risk is greater when they know they have a better chance of full repayment on time are very high. For a lender, this is a safer risk and will lend up to $100,000.
Good Credit (680 +) The majority of online lender offer to lend money to those whose credit score is 680 or better. The interest rates are very good and they offer loans from $1,000 and up to $50,000. They will assess your ability to repay (DTI) and can approve your application within minutes.
Fair Credit (600 – 680) There are specialized online lenders that will lend money to those with a fair credit score. The interest rates will be slightly higher and repayment terms shorter. Lenders loan ‘safer’ amounts of money capping at $25,000. to insure that they are repaid the loan within the allocated repayment term. These lenders will look at the complete credit history – a length of time you have had your credit cards, work history, salary. If your credit reports show that you are working to repair your credit, they will also take that into account. Some will allow you to have a co-signer as long as they qualify.
Bad Credit (600 and less) On-line lenders may approve your loan but for a smaller amount. They will be very concerned about your salary and work history. Rates will be very high and repayment terms very short. Sometimes this is the only option other than family to repay or consolidate existing debt. Having a co-signer or collateral is very important. The interest rates will be high and the lender would prefer you to have a co-signer and/or security (equity in your home). If your credit score is below 600, lenders see this as a huge red flag. If your score is low because of fraud, they wonder why you haven’t taken the steps to repair it. They will scrutinize your report to see who you owe money to, how many payments were missed, how many times you have applied for a loan and been turned down. This means you are an even greater risk that the lender will need to chase you for payments and risk losing the money they lent you.
Very poor Credit (400 – 550) Payday loans, installment loans, and cash advance loan companies may lend to those with very poor credit scores, but the interest rates are extrememly high and the expectation is that you will repay the loan within a few weeks to a maximum of 12 months. They will definitely look at how your Debt to Income (DTI) ration to see if you are even able to repay the loan. If you are already strapped for cash to pay off existing loans and credit cards, a loan of this type can very well crater your financial position.
WORK HISTORY
It is very important for a Lender to know if you are working full-time, how long you have been at your place of employment and how much you earn annually. They look at your ability to repay the principal and interest that they have loaned you. YOur work history and salary are a very good indicator as to your ability to repay the money you are borrowing. Depending on your credit score, the lender could review your current and new debt (credit cards, loans, student loans) to assess your debt to income ratio. This is done by adding up credit card minimum payments, monthly loan payments, monthly alimony, and child support payments, monthly mortgage (principal, interest, insurance & property tax) or rent payments and any other debt you may have. (Your living expenses such as groceries, gas, utilities, and taxes are not included in this calculation). Divide the monthly loan, credit card, rent or mortgage payments by your gross monthly income (before taxes) This will give you your DTI (Debt to Income) percentage. The lower your DTI, the less of a risk you are to lenders. If lenders discount your child support, utilities or any other amount from you debt report, you should not. You need to be comfortable making this payment because it’s going to be with you for a very long time.
These are the following DTI brackets and what they mean to you and a lender:
35% or less. A lender views this number as it means if they lend you money you as a borrower are less risky to lend money to. It appears that you understand debt and the terms of repayment. It shows a prospective lender that compared to your income, your debt is at a manageable level and you have the ability to manage new debt.
36% – 49%. If your DTI (Debt to Income) falls into this percentage bracket it is an indicator that with your salary, you are managing your debt adequately. There is room for improvement. If your DTI falls within this bracket a lender may ask that you meet additional criteria before they will lend you money.
50% or higher. This bracket states that you are not managing your debt very well compared to what your monthly income is. It would appear that you have very limited funds to spend on any additional new debt. This bracket shows that over half of your salary is already allocated to existing debt. A lender may limit your borrowing. (less money, higher interest, shorter terms)
What does this mean to you? You may have a credit score of 700 – need $5,000 to pay off a couple of high-interest credit cards. If the term was 36 months and the interest 19.95%, your monthly payment would be $185.69. If you are earning $2,000 a month and your rent is $700, credit card(s) monthly minimum payment is $400, vehicle loan – $150, student loan – $250 plus the payment of the new loan your DTI is 85%. A lender would assess that based on your DTI, your ability to repay a new loan is an extremely high risk and would not approve your application. Another example is if your credit score was 650, and the previous criteria are the same, except you earn $4,000 a month, your DTI would be 42%. A lender would be much more willing to lend you money and may approve your application for $5,000 as you would not be considered a high-risk borrower.
This example will give you a general idea of debt to income
| Debt To Income (DTI) Calculator | ||
| Your Debt to Income (DTI) Ratio is: | 41.34 | |
| Monthly Income: | ||
| Your Monthly Income: | ||
| Gross Salary (before deductions) | 3,000.00 | |
| Other Monthly Income | 0.00 | |
| Spouse’s Monthly Income: | ||
| Gross Salary (before deductions) | 2,500.00 | |
| Other Monthly Income | 0.00 | |
| Total Monthly Income(s): | 5,500.00 | |
| Monthly Mortgage/Rent and Debt: | ||
| House Payment* | 1,500.00 | |
| Auto Payment 1 | 377.00 | |
| Auto Payment 2 | 0.00 | |
| All Credit Card(s) minimum payment | 300.00 | |
| All other loan payments | 96.66 | |
| Total Monthly Mortgage/Rent and Debt: | 2,273.66 | |
| Monthly Remaining Income after Debt & Mortgage: | 3,226.34 | |
| NOTES: | ||
| Monthly Gross Amount Paid: Total gross income from your and your spouse’s paycheck(s) | ||
| House Payment: Monthly Payment for your house if purchasing. Include Principal, interest, insurance (PITI) property taxes and homeowner association fees should be included. | ||
| Auto Payment(s): your monthly auto loan payment(s) not including auto insurance | ||
| Credit Card Payment(s): The combined total minimum payments on your credit cards | ||
| Other Loan Payment(s): The combined monthly payment of all student, personal, unsecured etc. loans | ||
SECURITY
Many lending institutions on-line are not set up to use the equity in your home as security. Since they are an ‘on-line’ lender, they would have to hire an appraiser to appraise your home. It becomes more complicated to approve the loan. There are a few online lenders that use security if applying for a secured personal loan. Your credit score may be within the 600 – 700 range, but your income does not support repayment of the loan requested. Often people are looking for larger loans ($15,000+) and their score is fair – good. They could easily use their home but the online lender is based in another state. The best thing to first of all do is go to your local credit union to see if they will give you a Secured Personal Loan or a HELOC (Home Equity Line of Credit). On-line lending means you don’t have to go into the bank, you can remain somewhat anonymous, borrow money from the convenience of your home, but in some cases, it is best to walk into your bank and/ or a local credit union applies for a secured personal loan. If you have equity that you could use, be sure to ask if where you are applying accepts security.
Another form of ‘security’ is to have a co-signer. Your co-signer would go through the same process but would need to have a good to excellent credit score. As well, they would need to disclose their income and existing debt to the lender as they will be responsible to repay the loan on your behalf if you default payments. Should you default on your loan payments, it will negatively affect their credit score as well as yours. Not all online lenders accept a co-signer, so be sure to read the disclaimer when you apply.
PURPOSE FOR LOAN
If a lending institution is looking at approving a loan they will want to know what you are using the money for. They will want to know if the money is being used to consolidate debt to repair your credit, a medical emergency, to purchase a new vehicle, or to purchase a home. If you are borrowing the money to help pay normal monthly bills, they will definitely take a very close look at your credit history and ability to repay any new debt.
PLACE OF RESIDENCE
You may qualify for a loan based on the above criteria, but you are still not approved. Not all online lenders lend in all 50 states. Be sure to check if the lender you are applying to does not lend in the state you reside in. Many lenders have state restrictions or have yet not completed the process to lend in all states. All Lenders will give a disclaimer as to the states that they don’t lend in or that they do lend in. Be sure to look for this below the application.
SO NOW WHAT?
You have an emergency, want to pay off a couple of high-interest credit cards, need $500 to fix your car to get to work. Your credit score is below 600 and you have been to your bank so many times, they lock the doors when they see you coming. What do you do? Don’t give up!!! And don’t panic!!! When we are feeling scared and pressured we usually do not make a good decision. Take a step back. Take a deep breath. What is your score? What is your salary? There are companies that offer short-term financing (2 weeks to 36 months)- is this a good fit for you with where you are at? If you take a loan now, will it pay off in the long run? If you own your home and have equity, try a local credit union as they may be willing to give you a secured personal loan. Is there a family member that would be willing to help? Sometimes it is better to ask for an increase in your credit card limit if all you are looking for is $300 -$1000. The interest rates will not be as high as some short-term, installment lenders. Another possibility is to move your balance on your existing credit card to one that offers 0% interest for 6 months to a year, thus paying off your existing credit card and giving you some room for your ’emergency.’
Think about what you are trying to accomplish – a quick fix, consolidate to improve your credit score, manage your finances better. Do you need to be patient and rebuild your credit? If you can work on your credit it will improve your chances of being approved for an online loan.
STEPS TO REBUILD YOUR CREDIT
Credit Cards – make the minimum payment on time every month. NO EXCEPTIONS. By being consistent in this your credit will improve over a few months.
Credit Report – review your complete credit report and confirm that all information on your credit report is accurate. If not, find a Credit Repair Company to help you fix it.
Loans (Student, auto, personal)- make monthly payments on time
Utilities – make payments within the allocated time frame
Budget – take the time to manage your living expenses and loan/credit card payments. Live within your means. Buy only what you need not what you want. Remember this is temporary and you are helping you and your family in the future. Remember your credit score and report are the keys to better loans, better interest rates, and better repayment terms. Only you can change this.
Outside help – if you owe over $10,000 in debt there are debt relief companies that will help you negotiate better terms and interest rates with your lenders.
Sometimes we need the help to get us through a tough time. It happens. Rather than being stuck ask for help. It is a mature person that realizes they need the help and aren’t afraid to ask.
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