A credit score is surely an important financial factor during the loan process. But that is not the only aspect lenders look for. That was an old-school approach.
Nowadays, you can even apply for extremely bad credit loans in the UK. This is due to the liberal borrowing policies of new-aged direct lenders. However, other factors should prove your creditworthiness. Only then is it possible to approve funds.
Elements that lenders consider besides your credit score
Income stability
Your income should be regular and stable. That is the strongest factor that ensures a borrower can make convenient repayments. Also, that income should be provable through salary slips and bank statements.
If you are a self-employed or a freelancer, keep ample records of your work. Multiple projects and clients help you get approved faster. If you depend on only one or two clients, it is not considered a strong earning. What if you lose both or one of the projects? You may struggle to pay even for the basic expenses.
Debt-to-income ratio
Keep a low debt-to-income ratio and borrow funds hassle-free. A 70:30 ratio is considered perfect, which means your debts are 30% of your income.
With an increase in the debt-to-income ratio, approval chances get low. The higher the debt percentage, the lower the chance of attaining funds. For example, if you have a 50:50 ratio, you may get approved, but the interest rate will be higher on a smaller loan amount.
Employment history
Employment history is considered good if it is stable. It means that if you stay with your employers for a long time, lenders consider you a responsible person. Especially, never switch jobs right before you apply for the loan.
Stay in the same job until you do not accept budgets in your account. You may have your career plans, but lenders need to see if you will stay in your job or not.
At small six months before applying for the loan should be in the same company. If you are self-employed, make sure you work for the same clients for a long time.
Savings and financial reserves
In short-term loans, you may not need to show a savings or financial reserve record. But in several circumstances, such as previous rejection history or employment gap, it can help.
Loan providers just want to see financial stability and back-up you can use to pay instalments. Therefore, it is good if your bank statements show savings. This provides a sense of comfort to the lender. Otherwise, you may get rejection on the loan application.
Repayment history
Pay bills and debts on time to boost approval chances. As mentioned above, loan providers are most interested in the last six months' financial records. Hence, you need to make sure that during this time, you pay bills and existing debts on time.
After income and debt-to-income ratio factors, it is the most important one. Along with the other aspects, this can affect the approval decision considerably.
Bank account activity
Maintain healthy banking behaviour because that too is important for lenders. Your banking records tell a lot about your financial habits that directly affect your creditworthiness.
Avoid frequent cash deposits and withdrawals, transactions, missing debt or bill repayments, cheque bounce, and unusual transactions. Such habits can make the lender reject your loan application right away.
Residential stability
Stay at the same address, or else lenders may think it will be difficult to track you in case of delayed payments. Especially if you have a poor credit score, lenders may believe that you are avoiding other lenders by changing addresses. In that case, your current loan application may not get approved.
Stay in the same place when you are applying for the loan. Keep all documents that authenticate your residential stability. Utility bills are the most relevant documents to prove your residential history.
Loan purpose
Your purpose for borrowing funds should be clear and relevant. However, in the case of personal loans, unsecured loans, there is no need to mention the purpose. But in case of a purpose-specific loan, like an emergency loan or debt consolidation, you need to know what you want to attain through borrowing.
The loan purposes should be clear, and sometimes, even a cost breakdown may be required. For example, if you apply for home improvement loans, the lender may ask you to provide a cost breakdown along with the specific purpose.
You may need only kitchen remodelling, or maybe a complete home renovation is required. Whatever your reasons are, learn to explain them well and in numbers or amounts.
Age and financial experience
Both age and financial experience tell a lot about your financial stability. With age, lenders get to know about your earning potential, employment stability, and proximity to retirement.
From your financial experience, finance companies can know how well you managed your debts. Therefore, these two factors are important during the affordability check. Age limit is no longer the only eligibility condition. Similarly, financial experience is much more than just a number of years.
Application accuracy and completeness
Always provide accurate and complete details. Whether it is your personal or financial information, make sure you mention it correctly. Otherwise, it can be considered as fraud. If it repeats more than one time, lenders may blacklist you.
Lenders are most insecure while processing the applications for extremely bad credit loans in the UK. Due to very poor credit score they find that borrowers hide their information to get approved. But nothing is possible to hide these days due to online verification.
Credit utilization
High credit utilization or maxing out your credit cards shows that you survive on credit. This can be a red signal for the lenders. They may reject your loan application, considering you irresponsible in financial management.
If you really want to get an approval, make sure to reduce the credit utilization. Using up to 30% is considered safe. The better you manage your credit accounts, the easier it is to get approved.
Conclusion
The affordability factors above prove your repayment ability easily. Therefore, even if you have a poor credit score, make sure the other financial aspects are in your favour. Loan companies also need to follow the rule of affordability assessment. Only if you are financially able to repay a loan can they approve your funds.
