How Do Lenders Determine Your Credit Risk?

When you’re borrowing money from a professional lender (as opposed to a personal loan, for example), the conditions of the loan will change according to your own personal situation. Many things play into this, and it can sometimes feel like you’re being treated unfairly. But look at things from the lender’s perspective – it’s a business that’s supposed to make money at the end of the day. If they allowed high-risk borrowers to take out loans with the same conditions as regular ones, they would eventually run out of money.

That’s why lenders need to change certain factors of the deal to compensate for the percentage of borrowers that do eventually default on their loans. If you want to make yourself look as attractive as possible in the eyes of a lender, you should keep several factors in mind.

Your Job

Not all lenders are going to care about your job or how much you make. However, if you’re seen as a higher risk than other customers, you might have to provide proof of income. This is also a standard procedure with some specific types of loans, like payday loans. The amount you earn will directly determine certain conditions of the loan in those cases, most notably the limit on how much you are allowed to borrow. Keep in mind that some lenders might not tie the loan’s repayment date to the actual date on which you’re getting paid yourself, which can put you in an uncomfortable situation if your money comes in a few days after you’re supposed to pay the next installment.

Your Credit History

How well you’ve behaved as a borrower in the past will also influence the way lenders see you – which makes perfect sense, after all. Nowadays, it’s easier than ever to track a person’s actions related to their finances, and there are many tools creditors can use to take a better look at you. Your credit history is a summary of everything that might be of interest to a creditor, so you should make sure to pay all your bills and loan instalments on time. Otherwise, you may have to look for loans with worse conditions than you’d normally be entitled to.

Your Assets

How much you own is going to be a factor as well in some cases. When you want to take out a secured loan, you have to put something up as collateral, and the value of that asset is going to determine how much you can borrow and how fast you have to pay it back. Something like a house can give you access to quite the good deals, but it’s also a huge risk. If you’re not sure that you’re capable of paying back that loan on time, you face the very real prospect of homelessness! And that’s bad enough when you’re on your own, but when you’re also responsible for a family, you have to be really careful with decisions of this calibre.

Your Attitude

Lenders are people, too. They will take note of how you present yourself and what kinds of vibes you give off. Try to make a good impression – show up showered and nicely dressed, and be pleasant in your conversations. This might not seem like much, but remember that the person you’re talking to will often have a lot of control over certain conditions of the loan. They might be willing to extend it for a bit longer, or knock off a bit of the interest rate if you have a reasonable argument for that. Your chances of this happening are significantly reduced if you seem like an unpleasant person. Plus, it might make lenders question your willingness to pay off the loan in the first place, which is something you don’t want happening at all.

Working with the Same Lender

There are other factors that might also play a role in the whole ordeal. If you’ve taken out loans with the same company before, they will consider how you’ve handled those. Sure, they already have access to your credit score, but deals done directly with the same company will have much more weight in that consideration. If you are responsible with the way you use loans, try to take advantage of that. Bring it up during the discussion of your loan terms, and point out that you’re a low-risk customer who should probably get slightly better conditions. After all, the company stands to profit from that in the long run as well – they will have a recurring customer who they know is dependable. If you run a personal business or do anything else that might have you frequently taking out loans, building a relationship with a specific lender might not be a bad idea at all.

Options You Can Use When Your Credit Score Is Bad

Having a bad credit score is not the end of the world – although it can make your life much more difficult until you fix it. There are still various options you can use when you’re in this kind of situation, and it’s important to be aware of them so you can avoid making a mistake in a state of panic. In the end, you should come to terms with the fact that you’ll have to pay a higher interest rate or deal with otherwise unfavourable conditions.

But compared to not having any access to money at all, it’s still something. And if you are determined enough, you should be able to eventually fix your credit score and restore it to a good state that allows you to operate more efficiently. Until then, here are some options you can consider.

Bad Credit Loan

A bad credit loan is just what the name implies – a product designed for people in a situation like yours, who don’t have access to any better offers on the financial market. Bad credit loans typically come with some conditions that make them worse than regular ones, such as a higher interest rate. On the other hand, the approval process is easier and more streamlined compared to an ordinary loan, and you can expect to have the money in your hands much sooner.

Payday Loan

Payday loans are another popular option among people with bad credit. They’re designed to be paid off on a very short term – typically a month or less – hence the name. A payday loan does not necessarily have to be tied to your actual pay check, although some lenders will look at how much you’re earning to determine your upper borrowing limit. This can be inconvenient if you have no way of proving your income at the moment, so plan ahead for that and make sure that you can bring something to the table when talking to a lender.

Personal Loan

This is not a product available on the financial market. Rather, it refers to a loan you can take out from a friend or family member. As you’re probably guessing, these loans can have more favourable terms than traditional ones, but they’re also not universally available. Borrowing money like that can also come with certain additional implications which might not be very pleasant to you.

The mere idea of asking for money can be shameful to some people, but it’s something you’ll have to deal with if you want to get out of a tough financial situation and have no other options available. And in the end, most people will be more understanding than you might assume, especially if they’ve gone through something similar in the past themselves.

Extra Collateral

Do you have anything of value? This can change the context a lot when taking out a loan. A secured loan can provide you with access to much better conditions than an unsecured one despite your bad credit score. Of course, there’s a limit to how useful this can be to you. Assets like your car and home are generally the most valuable ones you have, but putting them up as collateral for a loan can come with a severe risk attached. It’s something you definitely don’t want to do without a very careful consideration, and it’s only a good idea if you have no other options available.

Still, a secured loan can give you access to the conditions you need in a difficult situation, and it might be your only option if you need to borrow a larger sum of money. On the bright side, as long as you have the ability to pay back what you owe, it doesn’t have to be such a troubling prospect.

Reducing Expenses

This might not sound like a direct tip, but it’s actually an important point to consider. Many people in a situation where they need to borrow money on an emergency basis only focus on acquiring more cash and rarely pay attention to the other side of the coin – reducing how much they’re spending. This can make it much easier to deal with an unfavourable loan for a brief period of time if it comes to that, so it’s definitely not something you should ignore. And while it’s true that everyone’s situation is different and it can be difficult to say exactly which expenses you can easily cut out, it’s still worth taking a look and giving it some thought. You might even fix something with your finances in the long run if you discover that you could have reduced your expenses in some minor way all along!