The essence of what lenders look for in loan applicants is the financial ability to make the loan repayments and evidence that the applicant will prove to be a good credit risk. The ways in which lenders make these determinations will vary but the principal is reasonably consistent.
The first thing any lender will consider of a loan applicant is their income and their ability to meet the monthly loan repayments. They will look at the applicant’s guaranteed monthly income and compare it with their fixed outgoings, such as mortgage payment or rent and other credit, as well as making some allowance for everyday expenses such as groceries and utility bills. Whatever format the specific lender uses, there will be a bottom line where the remaining disposable income will have to exceed the amount of the monthly loan repayment for the application to proceed further.
The next thing the lender will do is assess the applicant’s overall financial and personal circumstances by a system known as credit scoring. This will involve a consideration of such as how long the applicant has been in their present employment, how long they have been at their present address, how long they have been with their bank and how much other credit they have or have had in the past. They will essentially assess all the information the loan applicant was asked to provide on their application form and attach a score to it, the higher the better. At the end of this process, the applicant has to have achieved a certain score for the application to proceed to the next stage.
Credit referencing is where the lender will make an enquiry of such as Experian – or another Credit Referencing Agency – to ensure that the loan applicant does not have a bad credit history. The discovery of any negative information in this search is likely to terminate the application, though if the applicant disputes the findings, they may apply to the Credit Referencing Agency direct for their credit file.
Depending upon who the lender is, there may be other certain checks which they will make. One example would be where the applicant makes a loan application to their own bank. The bank would also consider in this instance the history of the applicant’s relationship with them and this could have either a positive or negative effect on the application.
The fact is that lenders are looking much more closely at loan applicants and their financial and personal circumstances in the wake of Credit Crunch. While this may lead of course to applicants who would previously have been accepted being refused, the principle has to be good for all parties in the long term.