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5 Things lenders look at before giving a loan

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While credit score plays a large decision in your financing, there are several other considerations. In the financial world, these factors are referred to as the “Five C’s.”

Credit Score

Think of it as the report card of your financial trust worthiness. Credit scores offer potential lenders an overview of lending history. (Learn more about credit score in our previous article.)

Capacity

Also known as debt-to-income ratio. How much can you really afford? A good rule of thumb is for total monthly commitments (including the new loan amount) to approximately half of your monthly income.

Did you know student loans are now counted, even if they are deferred? If your monthly debt is too high, lenders may have concerns about your ability to pay back the loan and could be a reason it wouldn’t be approved.

When it comes to credit cards, it’s a good idea to keep 70 percent of your card balance free versus maxing it out. Your employment history is also considered. Being employed at the same place for two or more years can help relieve concern for lenders that your income may suddenly disappear.

Capital

While your income is the primary source of repayment, capital is the term used for other assets you have like savings, investments, or property you own. These assets could potentially be used to repay the loan if you lose your job or experience other setbacks.

Collateral

This is really a factor when you’re looking for a line of credit or a secured loan (such as a car or home loan). Essentially, using collateral means you pledge an asset as repayment of the loan if you fail to make payments. Using collateral typically comes with lower interest rates. However, it also means you can lose that item if you default on the loan.

Conditions

How long is the loan length? A longer loan time can mean a lower monthly payment but also provides more opportunities for default. This is why a 15-year mortgage often has a lower interest rate than a 30-year mortgage.

There are definitely benefits to being able to pay off a loan quicker, including a lower interest rate, but everyone’s financial situation is unique.

Don’t add a sixth C of Confusion. Your Numerica team is here to help clear up concerns and questions you may have to be able to finance your dreams.

Visit your favorite branch or give us a call at 800.4333.1837 today.

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July 22, 2018

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