What Lenders Look for When You Want to Borrow
When looking to borrow, you are best advised to know what the lenders will look for when applying so that you have a better chance of being approved.
It can also be beneficial for you since it can affect your credit score. When applying for a loan, depending on the type, some lenders may run a hard inquiry (credit check) while reviewing your loan request to determine your creditworthiness. This provides them with insight as to what sort of risk you might be as a potential borrower, and helps them to determine whether you are likely to make your payments on the loan.
Borrowing from Banks and Credit Unions
Banks might have some of the better interest rates, but if you hope to have a chance of qualifying you must have a good credit score for any chance of approval. With every bank having different requirements, many require a score of close to 740 and sometimes higher. Most Canadian banks also have a minimum amount of a few thousand dollars and their requirements to borrow can make it more challenging to be accepted than other options like online lenders.
Some credit unions can be an alternative and may even have lower minimum amounts to borrow and even low rates but usually have membership requirements, such as living in a specific area and other terms.
With both banks and credit unions, the funding time for an unsecured loan can take longer than many online lenders. If getting the funds quickly is a concern, this is something to also consider.
Borrowing from Online Lenders
Many online lenders compete with banks for unsecured loans and can often be easier to qualify for when applying. Additionally, many online lenders do not have locations which reduces their operating costs and often pass that savings on to a customer with comparable or even lower rates than many banks. To compete with banks, the private online lenders will often have less stringent requirements to qualify. The primary advantages of online lenders is often faster funding and convenience, but with a good credit profile some borrowers will find some of these lenders having comparable or better rates as well.
Types of Borrowing
When it comes to borrowing without collateral, unsecured loans are often the choice. This type of loan is available from most banks, credit unions and online lenders. While more costly than a secured loan (e.g. mortgage, auto loans) it is one of the most common ways to borrow in Canada.
Personal Loans – this type of loan will provide the better interest rates, but it can be difficult to qualify and get approved for some. To get a preferred rate your credit score often needs to be close to mid 700s to qualify, along with a low debt to income (DTI) ratio as well.
Installment Loans – with a fair to good credit score required, this can be the next best option to a personal loan available. The credit score requirements can be less, along with DTI, but usually requires a credit score of at least 600+ in most cases.
Payday Loans – often considered a last resort when borrowing, this is an expensive way to borrow but is much easier to qualify for. High interest rate loans such as these would be best considered when all other borrowing options have been exhausted.
Line of Credit – this option often requires a minimum income of $35,000-$50,000 to be considered and equity in your home of usually 25% or greater.
Cash Advance – when you can use quick funds and don’t mind the rates, using your credit card for a cash advance is another way of getting quick cash. The amount available for a cash advance will vary and is often up to 35-40% of the limit on your credit card. This is another high interest borrowing option with rates often 20% or higher.
HELOC – if you own your home and have paid down enough of your mortgage you may qualify for a home equity line of credit (HELOC) as another way to borrow. This often requires passing a mortgage stress test proving you can afford the payments under trying conditions such as a higher rate than your agreement might offer. This option also requires equity in your home which often starts at 20% or greater to qualify.
RELATED: Personal Loans – Banks vs Online Lenders
Fast Facts on Funding
Most lenders want applicants to be employed, but it’s not the case with all of them. Some will consider what they regard as a reliable income. While this usually varies by lender, some will consider ODSP income or other types of social benefits, while others may consider pensions or self-employment.
With many online lenders you can get the funds even faster (if approved) by requesting an etransfer, which is a funding option available in Canada. Using etransfer funding options can provide the money in your account the same day with some lenders.
If you have bad credit getting a loan isn’t impossible, but it’s likely that you may pay more. This is the cost of borrowing and to be expected. There are many options for bad credit loans to be found and so long as you understand the terms and monthly costs you should be fine. Always read a loan agreement before signing and ask questions if anything is not clear.
RELATED: Guide to Borrowing Money Online
To Borrow from a Bank or Online Lender
Banks often have some of the better interest rates much of the time, but to qualify you must have a good to excellent credit score. With each bank having different requirements, many require a score of close to 740 or higher.
It’s often said (here at GoodCheddar) that you don’t necessarily choose the loan, it chooses you. What is meant by this is that your current financial situation and credit score will usually determine what type of loan makes sense to apply for will depend on how you qualify.
If your credit score were below 600 and you tried applying for a personal loan at a bank for the amount of $20,000 with a 5 year term and your income is $40,000 annually, you would not have much chance (if any) of your loan request being approved. In addition to what you might qualify for you should also consider how lenders will look at what you can afford. Most people have some kind of debt and make monthly payments. This can be towards your home or car loan, and then you might have other financial obligations such as credit card payments or some other loans or credit commitments.
When applying to borrow, regardless of whether you need a loan for an emergency or have other plans such as debt consolidation, large purchase or something else, taking the necessary steps before you start applying can make all the difference. If you don’t qualify for good interest rates but need the money quickly, then sometimes a payday loan can be a good option for some, as long as you understand the commitment and the payments.
Determining what you can afford from a lender’s perspective and being aware of your current credit score will help you with figuring out the right type of borrowing options to consider and types of loans to consider applying for that can save you time, along with the frustration of being denied if you spend all your time applying for options you won’t qualify for.
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