Whether you are a regular wage earner or an owner of a small to medium-sized business, at one point or another you are bound need a loan. Loans are necessary for most individuals and businesses – without them, many individuals would have to live from paycheque to paycheque and businesses would have to wait years before they can expand or make necessary investments.
Given this need it is crucial then, that people make themselves good candidates for loans. Unfortunately, many venture into loan application without realising beforehand just how unfit they are for a loan. This makes loan application very frustrating for many, but frustration can be avoided and easy loan application achieved when you know exactly what lenders are looking for.
What Lenders Look For
Lenders won’t hand loans out to just anybody. Lending is a risk, and as such lenders take great precautions to make certain that big risks are avoided. In avoiding such risks, there are two basic things that they look for in borrowers:
- Sufficient assets, collateral or sources of finances to pay off the loan
- Solid track record of payment of previous bills and loans
In most cases, lenders will look at your credit history and credit score as the main determinant for whether or not you can be entrusted with a loan.
Keep Your Credit Record Looking Good
Keeping your credit history as spotless as possible is the first and key step to making sure you look good to lenders. But making your credit history look good and your credit score impressive is not a simple task. Here are some of the things you need to do to make sure your credit history will make you worthy of a loan:
- Get some credit – Of course, you can’t have a credit history if you don’t have credit. Start small with a fast cash loan or personal loan you can easily repay, or a credit card with a manageable credit limit that you can faithfully pay off.
- Pay your bills on time – You not only need to pay your credit card and other bills, you need to make sure you pay them on time. This may be a tad difficult, but with some proper money management, it can be done.
- Mix up your credit – Vary your credit so that lenders can see how good you are at managing different kinds of loans. Aside from getting credit cards, you can get car loans, cash advance loans and other types of loans so long as they are still manageable and within your financial capacity.
There are many other ways you can improve your credit rating and make sure that lenders simply can’t refuse your loan application.
Keep Your Records in Order
Aside from making sure your credit score and credit history look good, you also need to make sure everything else that lenders ask for are available and orderly. Important documents for instance, should be organised and ready should lenders request for them. These documents include but are not limited to: official forms of identification (birth certificate, driver’s licence and passport), bank statements, tax returns, insurance records and cash-flow records.
Manage Your Cash Flow
If you’ve got a business and are looking for a loan to move it forward, make sure you’ve got a firm grip on your cash flow. Lenders won’t be pleased with businesses that have payables and receivables going every which way. They don’t want to wait around for your payment while you wait around to get paid by others. Make sure your cash flow is steady and stable so lenders get the steady payment assurance they need.
Determine the Value of Current Assets
Lenders want to be assured that in the event that you default on loan payments, you still have assets that may be liquidated to pay off the loan balance. So keep your assets and their values current for lenders to see.
Mind the Proper Ratios
There are certain ratios that are most suitable for certain loans, and these are loan-to-value ratio and debt-to-income ratio. The loan-to-value ratio is the ratio between the value of the loan you wish to apply for and the value of your assets. Generally, lenders would prefer the value of your assets to meet or exceed the value of your loan. The debt-to-income ratio is the ratio between the amount required to repay a loan and your income. Here, a 40% debt-to-income ratio (the loan repayments should only amount to around 40% of your income) would be preferable, as anything higher may be too risky for the lender.
Have a Precise Plan
Giving your lender a precise plan on what your loan will be used for, including start-up costs and possible returns that may be gained from the loan will give them greater faith in your ability to repay the loan.
You may not be able to control all the factors surrounding your loan approval, but you can influence them. By making sure you present what lenders are looking for, you can be assured of hassle-free loan approvals every time.
By Debra Wright
Debra Wright is a writer and avid blogger who broke into the realm of online marketing before it was cool. Wright has contributed to various sites and covers a diverse array of topics, from personal finance to money saving tips. She writes because she wants to know.