Three Loan Application Factors Determined by Credit Score
Tuesday, December 25th, 2007When you apply for a loan, your lender is going to take a look at your credit score in order to determine some things about that loan. First of all, the lender will be deciding whether or not to give you the loan at all. If you’re going to get the loan, the lender will use the credit score to determine what the maximum amount of the loan will be and at what interest rate the loan will be made. A high credit score translates to getting more high-maximum loans at better interest rates.
The first thing that a lender is going to decide when looking at your credit score is whether or not to give you a loan. If your credit score is too low (say if it’s below 400), the lender may not even consider giving you a loan under any circumstances. Different lenders will have different cutoffs for what they will and won’t consider. For example, a lender that specializes in bad credit loans may not have a problem with lending to someone who has a very low credit score.
Because the cutoff rate differs among lenders, the credit score is also used to determine the terms of the loan. The lender may decide to offer you a loan despite your low credit but will use the credit score to determine what terms of the loan are right for you. One of the main terms that will be determined by your credit score is the maximum amount of the loan. Let’s say that you applied for a $10,000 loan but your credit score was very low. The lender might agree to loan you money but will only offer you a loan of $2000. You can take the loan and hope to use it to rebuild your credit so that you can get a better loan in the future. Alternatively, you can opt not to take the loan at all.
Your decision about whether or not to take the loan may be influenced by the interest rate of the loan. The interest rate is something else that is frequently determined by your credit score. If you have a good credit score, you are likely to be offered low interest rates because various lenders will be competing for your business. If you have a low credit score, less lenders will be interested in you which will allow those lenders who do want to work with you the ability to drive up the interest rate. People with a poor credit score often find that they are only able to access low-limit loans with high-interest rates until they rebuild their credit.
