Are you ready to commit to long-term debt?
If you have past financial problems, make sure you address them before you apply for a loan. (Shutterstock)
Making major financial decisions that involve long-term debt should take an encompassing view of the past, present and the future. In other words, lenders consider the borrower’s financial credit record, current financial standing and the future potential for maintaining a similar situation that allows to repay the debt. That is how lenders look at it, and this approach is also reasonable for borrowers to use themselves before jumping into taking a huge loan or financing a major purchase.
While it is hard to foresee how one may fare financially, there are some tangible aspects that help borrowers and lenders alike in determining the likelihood of maintaining a sound financial standing. Knowing these can help you decide for yourself if taking a loan is a good idea and also persuade lenders into providing more favourable terms and rates.
Of course, lenders are different, with many being so rigid in terms of eligibility requirements and inflexibility in considering or assessing individual cases. But if you’re lucky to find a lender that adds a more human aspect to the underwriting process, you may be able to negotiate a better deal for yourself.
Here are the top points that are likely to be looked at.
Education and employability
Many lenders look closely at your education as well as past and current employment in a bid to determine your future employability. In fact, some US lenders have developed sophisticated matrices that even assess specific careers based on qualifications and the job market demand.
Even in a much more basic scenario, a person who has maintained a successful career with a steady income from employment over the years is more likely to be seen favourably by lenders than someone who seems to be hopping from one job to another. So at the very least, expect some questions that relate to length of your current employment and your past jobs and employers.
Why should you pay your utility bills and your loan payment on time? Because all of this creates your credit profile that lenders will look at when they are making decisions about funding a major purchase, a home or a car. So beyond doing the right thing, make sure that you always handle any financial transactions appropriately and close any pending issues in writing. If issues pop on your credit profile or in any record, it may be too late to tackle them.
Be always cautious in handling your financial information. If you end up a victim of identity theft, your credit profile may contain surprise that you don’t get to know until a lender brings them to your attention. In general, sound financial management even at the time when you’re not seeking credit is the best way to ensure that that you’ll easily qualify for a loan when you need it.
Past financial issues such as default, foreclosure, bankruptcy should be disclosed early the process. When you bring these problems to your lender’s attention and try to work out solutions around them, you get ahead of a problem that will inevitably emerge.
When people try to hide problems in hopes that they won’t get disclosed, they risk having theirs declined at the last minute. Reversing a declined loan is much harder than working out the issues through the process, providing explanations, to make sure that your funding decision is approved at the end.
Remember, although these issues may look negative, lenders also look forward to your ability to repay the loans. So build a good argument about how your situation has changed to the better and why now you should be a good candidate for new credit. Don’t expect a bank rep or an underwriter to connect the dots on your behalf. You must work with them on creating this new image for your financial situation.
Know what lenders look for
Be a solid candidate for new credit
Show off your ability to repay
Highlight your financial stability
Address — don’t hide — past problems.
By Rania Oteify