If you are thinking about applying for a loan, it is wise to assess your loan eligibility before doing so.
There are multiple ways to frame a discussion about loan eligibility. Oftentimes, loan eligibility is discussed with reference to the “five C’s of credit,” which are as follows:
This way, you can answer questions like, “How much loan can I get on my salary?” You can also figure out how likely you are to qualify at all.
Each of these categories has a number of specific financial metrics and details which creditors will investigate during a loan eligibility check. To make this list easier to understand at a glance, we have explained those metrics and details below.
Apart from its pricing policies, each lender has its own risk appetite and lending policies. They are allowed to establish their own crediting procedures depending on their organization and approach, as long as they stay within the legal requirements. Check the factors that might have some weight when the lenders determine someone’s eligibility for a loan.
This is part of establishing “Character“ and is one of the most important data points which a lender will assess. Technically, you have many credit scores, but it is most likely that a creditor will look at your FICO score. A higher credit score will help you qualify for more competitive loan offers.
Some banks and credit unions allow you to get your score for free, so check with yours. If that service is not offered, you can usually purchase your score from one of the three major credit bureaus:
While you’re checking your credit score, you should also order your credit report. You can receive one free credit report per year per bureau. The information on your report is used to calculate your score. So if you spot any errors, you can correct them before applying for a loan.
Another aspect of analyzing your “Character“ as a borrower is taking a look at your financial history. If you have had a foreclosure, bankruptcy, or lien, that will affect the loan offers you receive. The manner in which you dealt with the situation will also be considered.
To establish your “Capital,“ the value of your assets will be added up. A lender may also want to know what kind of cash reserves you have available. If you are applying for a secured loan, one or more of your assets may be tied to the loan to act as “Collateral.“
The source and amount of your income will be considered when you apply for a loan. Each lender has specific rules for what counts as “income.” Documenting your income is part of showing your “Capacity“ for paying back a loan. Like your credit score, this is one of the most important factors to account for.
As with your assets and your financial history, you may not need to do much to check your income yourself. But it is helpful to make sure that you understand the difference between gross and net income. It is also important to know your Adjusted Gross Income (AGI).
To establish your “Capacity” to pay back a loan – look at not just the money flowing into your accounts, but the money flowing out as well. This includes other loans you are paying back, lines of credit being utilized, and your regular monthly expenses.
This is another area where the rules and factors will vary from one lender to another. The wisest tact to take is giving yourself the most comprehensive portrait of your income and expenses. It will help you figure out what you qualify for, and what you can really afford.
As mentioned earlier, your source of income, as well as the amount, is a factor in determining your loan eligibility.
Finally, how you plan on using the loan? Local and economic constraints as well can have an impact on loan eligibility. This is what is meant by “Conditions” in the five C’s.
After you have checked your credit and taken the time to analyze your own assets, like employment status, income, debts, and financial history – you can work on improving your risk profile.
Making that risk profile as competitive as possible will help you to qualify for the most affordable loan offers. With the right loan, you can remain on track working toward your goals.