It’s Not All Credit Scores: Other Things Your Lender Might Be Looking At

Photo (cc) by frankieleon

When applying for a credit card, it’s relatively easy to get a seal of approval if your FICO score meets or exceeds the lender’s benchmark.

But that’s not necessarily the case with other types of loans, such as small business loans, personal loans or even some car loans and mortgages. In order to assume the risk you may bring to the table, some lenders might scrutinize a number of factors to determine if you’re a good fit.

In the video below, Money Talks News money expert Stacy Johnson offers tips on how to improve your credit score. Watch the video, then read on to learn about factors other than credit scores that a lender may consider.

The five C’s of credit

Lenders may also weigh another set of factors called the five C’s, or as Investopedia puts it, “five characteristics of the borrower, [that attempt] to gauge the chance of default.”

1. Character

Even if your credit score is through the roof, potential lenders may be interested in you personally as well as your credit profile, particularly for loans made to small businesses. Says the Minority Business Development Agency:

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan …

Subjective opinions will normally be less important to most lenders than the things represented by the other C’s, but depending on the type of loan you’re getting, they could still play a role.

2. Capacity

Will you be able to keep up with the monthly payments that accompany the loan? Is your debt ratio (what you owe vs. what you own) below the lender’s acceptable limit?

To answer this question, potential lenders may evaluate your stream of income, both fixed and variable.

When analyzing your income, creditors will more than likely be interested in the duration of your employment to determine the stability of your income. Is there room for growth? Frequent job changes or extended breaks in employment can be a red flag.

Your outstanding debt to pretax income ratio, also known as the debt-income ratio, can also come up, especially for large loans such as mortgages.Are you practicing sound debt management habits or cutting it close? Excessive late payments, exorbitant outstanding balances and constant adjustments in credit limits reflect a higher level of risk, and the APR will be assessed accordingly if the loan is approved.

3. Capital

Do you have the funds available to make a down payment and reduce the risk of default?

If you’re making a purchase that requires a down payment, such as a car or a house, having the cash on hand to contribute without completely depleting your reserves is important. The larger your deposit, the lower the loan amount, and the less risk the lender has to assume. In addition, the lender likes to know you have cash reserves. Otherwise you put yourself at risk of default if you have unexpected expenses.

Mark Twain said it best: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

4. Collateral

Are large assets available to help secure the loan?

When a lender loans based on collateral you provide, it’s known as a secured loan. Loans like those used to finance cars and houses are common examples.

Obviously, if you’re borrowing for a house or car, that asset will become the collateral. But there can be instances when a lender will look for additional sources of security in the event you should default. One typical example is with business loans.

5. Conditions

What are the current market conditions, and are your finances stable enough to remit timely payments over the term of the loan?

Wells Fargo notes:

Lenders may want to know how you plan to use the money and will consider the loan’s purpose, such as whether the loan will be used to purchase a vehicle or other property. Other factors, such as environmental and economic conditions, may also be considered.

And one S: Social Media

If you are seeking credit, be mindful of what you post in social media. As we reported recently, some lenders are mining Facebook, Twitter and other social media outlets to reach conclusions about creditworthiness. This factor could be especially weighty for applicants who have little or no credit history, according to CNN.

If you’re financially well-established, you might not have to worry about social media when applying for a loan. On the other hand, it’s never a bad idea to be mindful of what you broadcast to the world.

What experiences have you had when borrowing, or attempting to borrow? Tell us below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Reasons You Should Not Pay Off a Mortgage Before Retirement
7 Reasons You Should Not Pay Off a Mortgage Before Retirement

Here’s why it often makes financial sense to carry a mortgage into retirement.

13 Small Gadgets Under $20 That Make Life Better
13 Small Gadgets Under $20 That Make Life Better

These inexpensive electronics will make your day-to-day life a little easier — and happier.

5 Ways to Put an End to Junk Mail
5 Ways to Put an End to Junk Mail

Here’s how to keep unwanted mail from clogging your mailbox and trash can.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

If My Spouse Dies, Can I Get Her Social Security?
If My Spouse Dies, Can I Get Her Social Security?

If a spouse dies, will the survivor collect the other’s share in addition to his or her own?

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

8 Major Retailers Closed for Thanksgiving This Year
8 Major Retailers Closed for Thanksgiving This Year

More big chains are closing on the holiday to give employees a break and discourage crowding for public safety reasons.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.