Few people have the cash on hand to buy a car or house outright. This means that most people will be faced with the loan process at some point in their lives when they need to make a large purchase. There is a lot of consideration that goes into taking out a loan, so the process can be daunting. Be prepared to provide a lot of documentation. Here are three things that financial institutions look at when you apply for a loan.
No matter what type of loan you are seeking, the loan company will look at all the factors that contribute to your overall financial condition. Your credit score will impact the entire loan process, but they will look at much more.
Other factors are outstanding debts, past bankruptcies, foreclosures, tax liens, civil judgments and the number of recent applications for credit. First Quarter Finance explains that they will look at your liquid and illiquid assets as well as your employment history. The value of your collateral and the size of your down payment will also contribute to the perceived health of your financial state. Your banking information and credit accounts will round out the story of your financial life.
Visible Equity explains that aside from considering your collateral, your liquid assets and other factors are all relevant to lenders when they're determining your qualifications for a loan. A savings account is crucial to this process. It’s just one more thing that demonstrates your ability to repay, thereby reducing the risk of loaning to you.
Liquid assets include cash and assets that can be converted quickly to cash. Checking and savings accounts, certificates of deposit (CDs), mutual funds, stocks and bonds are all considered liquid assets. You may qualify for a lower interest rate if your liquid assets are enough to cover the loan in the event of a job loss or other setback.
Zacks explains that non-liquid (illiquid) assets, like real estate, valuables, and retirement accounts, make meaningful contributions to your net worth, but for loan purposes, they are less valuable than liquid assets. This fact doesn’t mean that you shouldn’t have them. It just means that the loan company is primarily concerned with how you are going to make your payments should you run into some trouble down the road.
Next Advisor explains that unless you have been lucky enough to stay in the same job for many years, your recent employment history can hinder you in the loan process. They really want to see some job stability because this directly impacts your ability to repay your loan.
If you plan to make a large purchase in a few years, keep in mind that lenders will want to see that you were in the same field of work for at least the last 24 months, and prepare accordingly. Unrelated jobs, even if there are no gaps in your employment, will look like your income isn’t reliable enough. If other factors look good, a spotty job history might not cost you the loan, but it could increase its interest rate.
Now that you know what financial institutions will be looking for, you can plan ahead and make some strategic decisions about where your money will boost your financial credibility for the loan process. The best way to assure your success is to prepare in advance.
If you think ahead about your large purchases, you may be able to resolve any questionable items on your credit report before you apply. You can build your savings and, maybe, start investing. If necessary, you’ll also have plenty of time to maneuver into a job you want to stay with a few years, so you can give them the 24 months they’re looking for. Advance planning allows you to paint the kind of picture the loan companies are looking for.