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How Loans are approved

A smiling woman holding a phone, indicating her successful loan approval. The image pertains to the topic of "How loans are approved."

Summary

Credit is a powerful tool that can help you achieve your goals, build wealth and meet your urgent needs. Therefore, it’s important to understand how a loan is approved. I.e the factors lenders consider to evaluate your application and make a loan decision.

Most of these factors, we’ve hinted at in other articles, but some of them are quite new, and paying attention to each of them and making sure they’re right before your application, would be key to getting you that loan.

Debt to income ratio

DTI is your debt-to-income ratio – it’s a percentage that compares how much you earn every month (before taxes) to how much you owe. It helps show lenders how much of your income you spend repaying loans and therefore gives them a good idea of whether you’ll struggle to pay back your potential loan or not. 

The lower your DTI, the better DTIs of about 50% may not even be considered by lenders, unless the applicant has a solid repayment history – so it’s best to aim for within the 30% range when considering your DTI.

Credit History

Your credit history shows how well you’ve paid off all your previous loans in the past and gives you a score between 300 and 850 based on how well you take loans and repay them. 

Your credit reports are hosted on National Credit Bureaus which are available to individuals, and the lenders who will assess your loan application. Here is a table showing how the scores are ranked for your credit report:

  • 720+: Excellent 
  • 719 – 690: Good
  • 689 – 630: Fair
  • 629 – 300: Bad

Consistent income & Cash flow

To be confident you can pay back the interest on your loans, lenders want to be sure that you’re receiving consistent income or earnings in your accounts every month. So, you want to make sure that any bank account information you’re providing shows a steady income coming into your account over at least 6 months.

But that’s not all – Lenders don’t just look at what’s coming into your account to make a lending decision – they also look at what’s left in your account after a specific period every month, quarter or year. This is known as your cash flow, and it can be defined as the balance between your income and expenses over a certain period.

Complete information

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