I have worked as a financial counselor, a loan secretary, a loan officer, and a grant writer.
Your Credit Application
Whether you are applying for a mortgage, a credit card, or a car loan, banks and credit unions are going to be looking for the same thing—how much risk they will take on if they approve your loan. They want to know if they will risk losing money by granting you the loan, or rather, if you will pay the loan and any accrued interest back to them. Financial institutions earn money by charging interest on the loans they extend. But they lose money when loans "go bad" and aren't paid back. They want to avoid as many of these bad loans as possible.
Basically, whether you get approved or denied for a loan depends on how much risk the financial institutions is willing to take on and how risky your credit application looks. If your loan is approved, the interest rate you are given will also be based on your potential risk to the financial institution. The more risk (or chance you will default on your loan), the higher the loan is going to cost you through the interest rate if you are approved. You can swear that you will pay back a loan, but the sad truth is that people lie and the financial institution can't tell which ones are honest and which ones aren't. Even people that truly mean to pay back loans sometimes fall into situations where they aren't able to. Your loan application is the best indicator a bank or credit union has for whether or not you are going to pay back a loan and what interest rate they should charge.
Every financial institution has their own loan policies and specific numbers they use to determine if your loan is approved or denied and these numbers and guidelines will change based on the economy and on their business needs. Having a strong credit application will help ensure your application is always approved. After working in the financial industry for many years, including as a loan officer, I can tell you some of the things a loan officer will look at when they review your loan application and what things can help or hurt you.
Your credit score is the quickest tool a loan officer has for determining what your credit risk is. Scores can range from around 400 to 850. The higher your score, the better. If you haven't had a lot of credit experience, it is possible that you won't have a score. This isn't a negative thing, but it doesn't help either. To get the best rates and to help approve your loan, you'll probably want a score in the 700s or higher. Scores in in the low 600s or lower don't look good to a loan officer. When you request your score (also known as a FICO score), be aware that it is not necessarily the same score that your loan officer will see. Each financial institution can use their own standards for determining your score.
Your credit score is determined by the items on your credit history. Your credit history is not an indication of whether or not you will repay a loan, but it does show a history of how you have operated in the past and the past is a good indicator of the future. It is probably the most important thing the loan officer will look at. You can check your credit histories for free from each of the major credit bureaus once a year by going to AnnualCreditReport.com. This is set up through legislation by the government to help fight identity theft. It's a good idea to check your credit report in advance for applying for a loan so you can see if there is anything that needs to be cleared up (such as mistakes or identity theft issues).
They will want to see that you have had experience with credit and have made on time payments. Late payments showing on your credit history look bad, especially since they usually only show up if you were more than 30 days late. A late payment on a mortgage looks worse than a late payment on a credit card, since a loan officer would expect a higher priority to be placed on your home. The loan officer will see how long you have had experience with credit by looking at the date your earliest account was opened. The more time, the better. And the more on time payments you have, the better.
Other things that could show up on your credit history include collections, judgements, and garnishments. These are big red flags to a loan officer. Obviously, it is best to avoid these, but if one of these show up on your credit history and you have a reasonable explanation for it, let the loan officer know. They can sometimes make exceptions for these items, but they'll need a really good reason to overlook them. If you are aware of any of these items on your credit history, pay them! It will show up as paid on your credit (which will also reflect in your credit score). A paid collection or judgement always looks better than an unpaid collection or judgment.
Some judgments come from lawsuits. If you are in court and are ordered to make payment, ask the judge if you can pay it right then. If you do, you may be able to avoid it ever showing on your credit history.
Bankruptcies and foreclosures also show up on your credit history. These are biggest red flags to loan officers because it can indicate serious financial mismanagement. It also shows other (sometimes large) loans that have gone unpaid. Remember, loan officers are looking at your past to determine your performance in the future. The best thing to do if you have either of these on your credit is making sure you handle your finances prudently from here on out by always making your payments on time. These items can stay on your credit report for 7-10 years. If there was an unusual circumstance behind your bankruptcy or foreclosure, that would no longer have an impact on your finances now, let the loan officer know. An example of this would be a medical illness that you no longer have. Loan officers can sometimes make exceptions, but not always, but give them the information they need to make a case for you.
Above all, a history of on-time payments is the best thing for your credit report. Having a variety of different types of credit (car loan, credit card, etc.) helps a little to, but is not nearly as important as showing that you can consistently make payments on time.
Another aspect of your credit application is your employment history. The financial institution will want to make sure that you are receiving and will continue to receive the money you will need to pay back their loan. The longer you are at the same job, the more secure it seems. Changing jobs right before you apply for a loan (or worse, while you are applying for the loan) makes loan officers cringe. They want to see that you have are secure in your employment. The first few months a person is at a new job is when they are at greatest risk of losing their job, either because of lay offs or because they aren't a good match for the company. Showing that you have been with the same employer for years is optimal. But don't fret if you haven't been at your job that long, your employment history isn't nearly as important as your credit history. If you have switched jobs, but have stayed in the same field, most loan officers will consider that the same line of employment.
Debt and Income
The next part of your credit application that a loan officer will consider is whether or not you can afford to make the payment on the new loan. This is one area where people with good credit history often get caught up on. The loan officer is going to look at all your debts and then compare this to your income. They will determine your debt-to-income ratio, or rather how much of your income is being spent on debt payments. Usually when you fill out your credit application, they will ask you to list your debts (other loans and obligations), but even if you don't, they will probably see it on your credit history. The loan officer may ask to verify your income to make sure you are making what you say you are making. The loan officers will assume that a certain percentage of your income is going to go to living expenses (food, etc.). They will want to keep your debt compared to your income at a certain amount to make sure you can handle your expenses. The amount allowed sometimes is correlated to the risk you represent from your credit history. If your credit looks a little more risky, then they aren't going to allow as much debt. If you have a strong credit history, that shows reliability and they may allow for a higher debt-to-income ratio. If your loan is denied for this reason, work on paying off debts or at least lowering your monthly payments or waiting until your income increases. Sometimes people will get a raise and immediately go apply for a new loan, but loan officers usually look at your average income, so unless they are certain you will stay at the higher amount, they are going to use your average. If you can, wait until your raise has been in effect for a couple months before you apply.
There are two types of loans, secured loans and unsecured loans. Secured loans are ones that have physical property to back up the loan, such as a house or a vehicle. The property is called collateral. Loan officers like these types of loan because if you fail to pay the loan, there is property secured, usually through a lien, to the loan. That means that they would have a right to take or repossess the property. This provides some protection to the financial institution because it gives them an asset they could sell to recoup the loan and their expenses with trying to collect the loan. Unsecured loans are loans that do not have any property tied to them. Examples of this type of loan are credit cards and signature loans. These loans are more risky for the financial institution because if you stopped making payments on your loan they wouldn't have anything they could use to recover the loan amount. However, these loans are not usually for large amounts like secured loans can be. Interest rates on unsecured loans are usually higher than on secured loans because there is more risk for the financial industry.
For secured loans, the loan officer is going to look at the value of the collateral. They will want to make sure the collateral is for at least the amount of the loan. They may sometimes allow the loan to be more than the value of the collateral if the rest of the application is strong. If you have a couple problems with the rest of your credit application, or if you don't have a lot of credit experience (reflected in your credit history), using collateral with more value than the amount you are requesting for in the loan is a good way to make up for it. You can do this by making down payments. The more value you have in your collateral compared to the amount you are requesting, the better it is for your application.
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The thing to keep in mind when applying for loans is that the financial institution isn't wanting to deny your loan, but for their sake and the sake of their customers, they have to manage their risk. Even if one bank denies your loan, that doesn't mean a different bank would. However, if you have some of the problems listed above, work to correct them and it will be easier. A strong application is built in the long run by developing a history of responsibility and reliability.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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Jimmy on April 25, 2018:
If a bank turns you down for a loan,is that bank legally obliged to explain the reasons in simple terms that can be understood,rather than just,you didn't meet the criteria?
Chris on April 23, 2018:
I applied for a business loan for a new coin laundry business, I got approval application and the lender did not release the money because they demanded additional documents. In that time where the builder was trying to finish the building got on fire and burned part of the building and equipment. I talked to the lender after the fire and they told me the loan will not be transferred due to the fire. Now they asked me to pay loan interest.
Is this is legal. They send me in writing that they will not release the money Until I send them my approval in writing .
susan pretty on August 18, 2017:
i got a loan approved thru a bank at 3.29 % and took pessetion of the vehicle last friday aug 11 2017, I received a letter in the mail today from the lending institution the app was denied but they had said it was approved earlier. so now what now they want me to pay 13.87 interest is that legal
Jones1969 on November 26, 2016:
I applied for a loan with my credit union I have been with for 19 yrs and they bought my other credit union which I been a member 16 years. Well I got a car loan with the credit union this year in Feb. My first payment was late due to some type of error with their banking. I also have a credit card with them too. Well I applied for a loan. They ran my credit stated that I was 30 days late on my mortgage per my credit report. The rep told me that if I can should them that it was not 30 days it would be ok. I sent over my payment which showed on my payment history from mortgage company. The loan officer came back to say he want a year of good standing for montage company. I tried to complain and the vp went on to say that I missed payments on car loan and that I have a bad payment history with them. I was always had a good payment history with them. I need to know who can I file a complaint with regarding false statement in my denial letter from this company.
Carinarod on September 30, 2016:
Can a mortgage loan application be review again for pre- approval after being denied? If I give the underwriter an explanation and proof to reasons of the denial?
AmandaLu (author) on August 28, 2016:
In general your chances would be the same with the new loan officer and the experienced loan officer. It really depends on the strength of your loan application. However, the experienced loan officer might have slightly more "override authority" that would allow them to grant a little leeway. But that would be extremely rare. It's mostly just based on their lending policy with your numbers punched in.
AmandaLu (author) on August 28, 2016:
I wouldn't be able to say if you are responsible for the loan. You may want to seek legal counsel. Sometimes contracts state that by taking possession of the vehicle you are agreeing to the terms of the contract.
AmandaLu on August 28, 2016:
Hi Jeff, This really depends on the lender. In some financial institutions the loan officer with more experience might have more "override authority" that allows them to bypass the set lending policy, but in general, it's not going to matter whether it's a new loan officer or an experienced one. It's going to depend on the strength of your credit application.
jeff on August 21, 2016:
Hello can you tell me if I have a better chance getting a loan with a loan officer with 14 years experience, then I do with loan officer with 1 year, does the loan officer have more pull getting your loan pushed through when they say they will fight for you to get the loan? or does the loan officer just punch in what you want and credit score and sees what comes back, thanks in advance
Angie B on July 27, 2016:
I went to dealership and took possession of a vehicle and was approved. I tried to take the vehicle back and dealership said it would go on my credit as a repo. so I kept the vehicle. so I called the bank that finance the vehicle and asked for a copy of my contract. they sent it to me and it didn't have my signature on the contract. so am I responsible for this loan?
AmandaLu (author) on April 24, 2014:
Ntuthuko, thank you for your comment.
Consolidation refers to taking out a loan or line of credit to pay for other debt or debts, so yes you can consolidate unsecured loans. I'm not sure what you are asking with the second part of your question about the steps to take to make things clear. If you are asking whether you should consolidate, that is something you'll have to decide for yourself. Consider whether the consolidation will increase your interest rate or elongate the time you are paying and how your monthly payments will change. Sometimes consolidating can actually cost you more money in the long term, although some people are willing to pay more to simply their payments. If I'm misunderstanding your question, please let me know, and I'll try again.
Ntuthuko on April 23, 2014:
Can I make a Consolidation to the Unsecured Loan and if so what steps must I take to make things clear???
AmandaLu (author) on April 09, 2014:
With some loans, early payments are not allowed to reduce interest paid (check your loan agreement), but I think what has happened in your situation is actually just the accrual of interest increasing. Let me walk through how interest owed is calculated.
APR stands for Annual Percentage Rate so 24% is the amount of interest you pay in an annual (or yearly) period. To figure out how much interest you are being charged a month, take 24% and divide it by 365 days in a year to get a daily interest rate. (.24/365=6.5753424657534246575342465753425e-4)
Take that number and times it by your balance to get the amount of interest charged per day. (6.5753424657534246575342465753425e-4 X $10,945) That's approximately $7.20 per day, or roughly $223 per month. As you pay more towards principal, the amount changes, replace the equation above with the new balance and and the daily interest rate (6.5753424657534246575342465753425e-4 X $10,772) and that comes to $7.08, or roughly $220 per month, so about $3 less due in interest the second month.
Now to your question, why did the interest amount go up in the second month? The reason why is because you paid early, the interest for the entire month had not been charged yet (similarly, it had not accrued or built up because that time, those days, had not passed yet.) So when you made your first payment on 3/6 you only owed $187 in interest at that time because that was the amount of interest charged from when your loan began to when you made your first payment.
However, with the next payment, the interest from 3/7 (the day after you made your payment) to 4/7 (the day you made your next payment) had accrued, basically a full month of interest had accrued by that point, which is why the amount was higher.
If you make early payments, you will pay less in interest because you will lower the principal faster and the daily rate of interest charged will be based on the balance of each day. A lower balance equals less interest charged. So, it is good to make early payments, but it might not seem like much of a difference at the beginning of your loan, it will be more noticeable as you continue to do so.
I hope this answers your question. Basically, the reason amount changed was because of the timing of when you made your payment. If you were to always pay on the same date, the interest charged would for the most part go down. (Interestingly, months that have 31 days are charged more interest than months that only have 28 days. That's because there are more days in the month.) If I need to clarify anything, please let me know. Thanks!
Angela on April 08, 2014:
I thought if you paid a couple of weeks early, more would be applied to the principal and less to the interest. Am I wrong? Also, Thank you so much for replying to my very first posts. It was very helpful!
Angela on April 08, 2014:
I also had another question. My car loan was $10,945 at 24% APR due to never having a loan or any type of credit before. My question is why do my payments keep going up and down? First payment of $360 made on 3/6, not due until 3/25: applied to principal($173) applied to interest($180something). After first payment, car balance went down to $10,772. SECOND payment of $360 made on 4/7, NOT DUE until 4/25: amount applied to principal($133) amount applied to interest($220something). Car balance is now $10,639. I am not late AT ALL so why did the amount change?
AmandaLu (author) on April 04, 2014:
Thank you for your question. I wouldn't be able to say if that would be enough to convince your CU because their loan policy will be based on their current loan portfolio and how much risk they are willing to take on at the time. There's a lot of things that are involved in what loans they choose to make such as how the economy is doing and what market conditions are like, and it varies all the time. They probably wouldn't be able to tell you if they could do the loan in six months or not at the point because it would depend on their needs and stability at the time. There's nothing you can do about that. The only thing you can control is to continue to make on-time payments which will build up a positive credit report for yourself. In my personal opinion, I feel it is a good sign that they told you to come back in six months. One thing to keep in mind is credit reporting can be a couple months behind your actual payments, so even if you've made six payments, it's possible only four of them might show on your credit report. If you are a strong borrower income-wise and the car's value is enough to be used as collateral, the history you are building by making your payments will increase your ability to refinance with the Credit Union, but I can't say for sure if it will be enough. Good luck!
Angela on April 04, 2014:
^^^Sorry, I meant to say I originally got financed with a sub prime lender in Feb. 2014 and I went to speak with my CU about what I could do after that. My credit union said to come and see them after 6 months of on time payments and I might be able to get a lower APR instead of the APR that I have now. My CU does finance up to 115% of KBB retail value so in 6 months ill be in that range. Ive also been paying my car payments 2 weeks ahead of time.
Angela on April 04, 2014:
I recently got a used car loan with little to no credit history. So the interest rate is horrible. I spoke with them and they said to come back in 6 months. Would 6 months of on time payments be enough to convince my CU to refinance me?
AmandaLu (author) on February 15, 2014:
The bank wouldn't be able to take the car back from you unless you default (or break) part of the loan agreement. So, unless your loan agreement specifically says something about keeping the same job, they wouldn't be able to take the car back just for that, and I've never seen a loan agreement that had that kind of stipulation. Usually the only reason a bank will take collateral (the car in this case) back is if you miss making payments or are consistently late with payments. If the loan is already set up and you have the vehicle, I wouldn't worry about changing jobs at all. However, if the loan is not finalized, as in you haven't signed the paperwork and received the money, then you are obligated to let them know you've changed jobs or it could be considered fraudulent information which could give them reason to take the car back. I hope this answers your question.
dieg aguilar on February 14, 2014:
Hello : i.just apply for a car loan i have poor credit and after i applied i got hire on another company it hasn't even past a week can the bank take the car back from me ?
AmandaLu (author) on November 09, 2013:
Hi Katie. Thanks for your comment. I can't really say what your chances are of getting approved for another loan because every financial institution has their own loan policy that they use. However, if your debt to income ratio is good and everything is pretty much the same as when you were approved for the first loan, you probably won't have any trouble getting a new loan. Making on time payments on the first car loan and the secured card both will help your credit score, and the insurance company paying off your loan will help as well. However, I wasn't sure what you meant when you said you had medical on your credit. If those are medical collection items, then it might be slightly more difficult to get a loan even though you now have established a credit history because now it will be impacting a score, when before, without any credit history, you probably didn't even have a score. Sorry about your accident. Good luck!
Katie on November 09, 2013:
This past July, I was approved for a car loan. My first car loan. I didn't expect to get that because I had no prior payment history and I had medical on my credit. However recently, I was in a car accident. ( NOT MY FAULT) and the insurance company considered it a total loss, and they will be paying that loan. I have had a secured credit card now for about 6 months, and I paid on that car every time on time ( only had the car for 3 months) what are my chances of getting reapproved for another loan?
AmandaLu (author) on July 24, 2012:
Good for you Monica!
monicamelendez from Salt Lake City on July 14, 2012:
My credit score used to be 520 and back then, I was super high risk for any lender. Fortunately I was able to get things turned around. After that banks stopped denying me when I applied for loans. Fortunately, that embarrassing part of my life is over. I hope that I never go back to that situation!