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6 Things Lenders Look at When Assessing Your Loan

Applying for a Loan

By Rebecca Pike, money expert at Finder

Taking out a loan can be a daunting concept for many, which is why you want the process to be as simple and stress-free as possible.

Understanding what lenders will look at when assessing your loan application is an important part of that for a couple of reasons:

  • Any application you make will go onto your credit file. You want to make sure your circumstances are suitable before you apply.

  • It means you can work on areas you know need improving before you apply.

No matter what loan you’re applying for, lenders typically look at these 6 areas:

1. Employment and income

Before a lender will offer you finance, it needs to know that you can actually pay it off. It will check your employment status and your salary, as well as how long you’ve been employed.

As personal loans tend to have personalised interest rates, some of these factors may also affect the rate you’re offered.

You could still get a personal loan if you’re self-employed, but you may need to provide additional documents such as tax returns and business activity statements.

2. Expenses

Lenders may comb through your bank statements to see what expenses you’re spending your money on. That would include spending on streaming services, phone bills, rent and how often you’re dining out or ordering in takeaway.

By comparing how much you spend each month with your income, lenders can work out how much money you realistically have left over to service your personal loan.

To be in a better position for lenders to approve your loan, particularly if it’s a larger loan, you should consider cutting back on any non-essential expenses like that extra streaming service or unused gym memberships.

3. Credit score

Whenever you apply for finance, the lender will check your credit score. The higher your credit score, the more likely you are to be approved.

Credit scores are affected by the amount of credit you already have and your past ability to make repayments on things such as loans and utility bills. Lenders will look at your credit score to determine how trustworthy you are as a borrower.

You can access your credit score for free here. If the score you have is less than ideal, there are steps you can take to improve it.

4. Existing debt

If you already have any loans or credit cards, lenders will check what kind of debt it is, how much it is and whether you’re making repayments. They want to see how much of a risk you are to lend to. If you’re building up debt in other places, they may be concerned.

It doesn’t mean you need to have no debt, but take a look at how much debt you already have and whether you’ve kept up with your repayments.

5. Buy now pay later

Although it looks like debt, buy now pay later (BNPL) has been a grey area as to whether it is considered by lenders, but that’s changing.

In June, the Australian Prudential Regulation Authority (APRA) told banks that they should take BNPL debt into consideration when they assess borrowers.

While this doesn’t officially extend to all lenders, your Afterpay, Zip, humm or any BNPL account you use could be looked at when you’re applying for a loan.

Start paying off those accounts and closing them if you want the best chance of getting approved for a loan.

6. Assets

If you’re getting a secured personal loan, lenders will want to know about the asset you’re securing the loan against. You can secure a personal loan against a car, your home and valuable jewellery and antiques.

Securing your loan against an asset means the lender may decide you’re more trustworthy. You’re more likely to get approval, lower interest rates and higher borrowing amounts. However, you’ll put your asset at risk.

When you offer security, lenders will want to assess it to make sure you actually own the property and to clarify its worth. If you’re getting a secured personal loan to buy a car, whether new or used, lenders will want to know information about the vehicle, such as the age, make and model. Some lenders won’t offer finance for cars over a certain age or if its value is too low.