Loan approval: More than just a credit score


Your credit score is based on the information in your credit report. Lenders can give you an idea of the interest rate you’ll pay on a personal loan from doing what’s called a “soft pull” on your credit report and score, but lenders will want other information as well before deciding whether to approve your personal loan.

Income and employment history

Employment and income verification are important. The lender wants to know you’ve got money coming in to cover the loan payments. If you’re self-employed, income verification may include you providing the lender with copies of your past years’ income tax returns. With online lending, there’s also a need to protect the lender (and the borrower) from identity theft.

Banking relationships

How much money you have in checking or savings can be a point of interest, too. A lender may want to review your bank statements to check on your cash flow.

If you’ve got a lot of money in the bank, a loan secured by a certificate of deposit could be an alternative to an unsecured personal loan. That type of loan will be covered in a future blog post.

If you’ve lived at your current address for awhile, that’s a good sign.

If you’ve got a mortgage, that can be something the lender considers in the decision to approve a personal loan.

Lenders’ credit models

The peer to peer (P2P) lenders put together their own credit models for loan approvals. The Federal Trade Commission (FTC) explains the standards these models must follow in a consumer publication: “Under the Equal Credit Opportunity Act, a creditor’s scoring system may not use certain characteristics such as race, sex, marital status, national origin or religion as factors.

The law allows creditors to use age, but any credit scoring system that includes age must give equal treatment to applicants who are elderly.

Risk-based pricing

Risk based pricing means the worse your credit is, the higher the interest rate on your loan. You have to do the cost benefit analysis to decide if you’re willing to pay the interest rate to borrow the money over the loan term.

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