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Factors That Affect a Lender's Decision on Your Loan

If your loan applications are often rejected, it is worth stepping back and examining the aspects of a lender's decision-making process that may be causing you difficulty.

Posted: 5th May 2021 by Finance Monthly
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When you're applying for a mortgage, auto loan, personal loan, or any other loan, you want to get the best outcome. However, your loan application may not go well all the time. It's because lenders consider a range of factors to ensure that they are extending the loan responsibly.

If you don't know what your lender is looking for, it can be more difficult for you to get approval. It would be best to acquaint yourself with the different factors that may significantly affect a lender's decision on your loan.

Before handing in your loan application, you may read through the following factors to help you get the most favourable response from your lender.

What Do Lenders Consider?

Lenders look at different factors when making loan decisions. While some of them are lenient when loaning the money, others can be remarkably strict. It's also worth noting that every lender is different and may place a greater weight on different factors. Many lenders look for trustworthy borrowers to minimise the risks of lending money.

Nevertheless, below are the factors that lenders usually consider when deciding on your loan.

Knowing them by heart can make the difference in qualifying for a loan and getting it at a good interest rate.

How You Managed Your Credit

Typically, lenders will examine your credit report to know how you've managed your credit with other lenders in the past. Different relevant information that lenders are likely to see on your credit file, but your payment history will probably have a large bearing on your loan application.

Typically, lenders will examine your credit report to know how you've managed your credit with other lenders in the past.

If you didn't incur missed or late payments in your past credit accounts, they may consider you creditworthy. But your payment history, along with other details in your credit report, is basically encapsulated in a single number known as credit scores. Such scores may range between 350-850, and the higher they are, the better off your loan application will be.

How Much You're Earning and Currently Owing

It is important to remember that lenders prefer loaning money to borrowers who they have confidence will repay the loan as agreed. With that, they will certainly use your debt-to-income ratio (DTI) to determine how much you're earning and currently owing.

Although each lender has different requirements when it comes to your DTI ratio, they usually prefer a percentage that is not higher than 36%. If your monthly gross income is $5,000, your total monthly debts should not exceed $1,080. The lender's goal is to make sure you have enough income to make payments on new debt.

How Much You Want To Borrow and What It Is For

The amount you want to borrow and how you plan to use it can also affect a lender's decision on your loan application. Basically, it's one of the bases that lenders use to determine how much interest they will charge. If you borrow a larger amount, you are also likely to pay more interest on your loan. But a 20% down payment may help you get less interest.

Depending on the type of loan you'll borrow, lenders may also require you to put up collateral. But they usually do that when you're applying for a substantial amount. Lenders would want you to secure your loan so that they have a sort of protection if you miss payments. The loan purpose may also have some bearing on your application, depending on your lender.

The amount you want to borrow and how you plan to use it can also affect a lender's decision on your loan application.

How Long You Can Repay The Loan

The length of time you'll be paying the loan plays an important role in the lender's decision. Note that they will usually feel more comfortable lending you the loan for a shorter time. It's probably because you're less likely to default on the loan if you have to pay it sooner. But of course, it would mean a higher monthly payment on your part.

How Much Liquid Assets You Have

Lenders often take into account your liquid assets when you apply for loans like a mortgage, auto loan, or home equity loan. If they see that you have funds or assets that you can easily turn into cash, lenders may give you lower rates or better terms. It gives them reassurance that you have a financial cushion to fall back on quickly to make repayments even if you lose your job.

What Are Your Options?

Besides the factors mentioned above, it's worth noting that the type of lender you choose can also make a big difference on your loan application. If you want to increase your chances of approval, you may have to go to a lender that best suits your needs and qualifications.

It would help to get yourself acquainted with the following types of lenders and see where you most fit in.

Traditional Lenders

Traditional lenders typically refer to banks and credit unions. For such a long time, they were only the sources for loans and lines of credit. Among all the available commercial lending options, traditional lenders may offer the best terms. But the problem is, they are harder to qualify for since they have stricter application requirements.


Alternative Lenders

On the other hand, alternative lenders have been around for only a decade. They are also known as online lenders, and they are not subjected to the same level of regulation as banks and credit unions. They often have more lenient qualifications and much faster turnaround times than traditional ones. However, these lenders may charge higher interest rates.


There are various financing options everywhere. However, they are not all created equal. If you want to get the best terms possible, you must take the time to shop around different lenders and work on what they're looking for.

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