In most cases, there are good reasons why a loan application is rejected. It is therefore incumbent on you to be aware on what these are as it allows you to fix these issues before applying for your next financing facility.
This article explores five key areas you must have knowledge of to improve your chances of securing an approval on your next loan and financing application.
1: How banks assess your loan applications
Different banks have different risk tolerance and therefore adopt different credit policies. In general, banks assess your loan application based on two principles: conduct and income.
“Conduct” is basically an assessment of an applicant’s loan repayment behaviour for a period of time, usually six to 12 months.
In other words, before a banker lends you money, he wants to know how you’re managing the current credit extended to you.
It is measured by calculating an applicant’s credit score before approving his loan application.
“Income” is simple. The more an applicant earns, the easier for him to make his loan repayments. Hence, before a banker lends you money, he will calculate your existing Debt Service Ratio (DSR) to ascertain whether you are capable to take on additional credit.
Loan Assessment = Conduct (Credit Score) + Income (DSR)
2: Do you have a good credit score?
The first issue is “conduct”.
Before submitting the next loan application, find out your present credit score with this free tool on iMoney CreditScore. It is a useful and easy-to-use tool which includes a calculation of a three-digit credit score that gauges your creditworthiness.
The score ranges between 201 to 781. The higher score indicates a stronger credit profile.
If you have a credit score above 580, congratulations! This indicates you are a responsible borrower and banks view you as a good customer. Your chances of getting approvals for loans is much higher.
If you have a credit score below 580, it’s best to focus on bumping your score to above 580 before submitting your next loan application.
3: Five factors that contribute to your credit score
If you use the free tool above, your score will appear on the left side of the report. On the right side, it tells you what you had done well and how to improve your credit score.
They are five key factors:
Factor 1: Payment history (Weightage: 40%)
This is the most important. It assesses whether you’ve been a good paymaster. If you pay your loans on time without missing a single payment, you should score well in this category.
Factor 2: Credit mix and amounts owed (Weightage: 30%)
Credit Mix refers to the types of loans you have. For instance, a mortgage and a car loan are examples of secured credit as credit is “secured” to a collateral.
Personal loans and credit card debt are unsecured credit as it is money lent to you without collateral. If you have “secured credit” and are a good paymaster, you will score well here.
Factor 3: Length of credit history (Weightage: 10%)
Is it acceptable being totally debt-free? In this case, banks do not view it as a good thing simply because they cannot assess your “behaviour” as a creditor. Thus, it hurts your credit score.
Factor 4: New credit applications (Weightage: 10%)
It refers to the approval rate of your credit applications for the last 12 months.
If your recent applications have been rejected continuously, it is best not to submit your next application. You could be jeopardising your own credit score and thus, making your situation worse.
Factor 5: Legal track record (Weightage: 10%)
It refers to any legal action taken against you as a defendant.
4: How to improve your credit score
Here’s a simple to-do-list to help improve your credit score in the next six to 12 months:
- Have a credit card or two to build your credit history.
- Pay your credit card bills in full every time.
- Keep your card utilisation under 33% of your limit.
- Refrain from making too many loan applications in a single year.
- Make your car loan and mortgage payments on-time.
- Pay your utility bills and traffic summonses.
- Keep track of your credit score every three to six months.
5: How much you can borrow
Once you have your credit score tabulated with iMoney CreditScore, scroll down to find a loan product calculator as shown below. From it, you may select one of the four products (example: Home Loan) and enter your monthly income.
Based on your monthly income and credit score, the system will calculate how much you can afford to pay in mortgage, the price of your property and your chances of getting your loan approved.
From here, you may proceed with the “Find a Home Loan Now” button to do a bit of shopping for the best home loan deals in the market.
If you are interested in a credit card or car loan, click onto any loan product to check out the latest and best deals in the market today.
This article was published in kclau.com
Ian Tai is the founder of DividenVault.com, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks that pay ever-growing dividends year after year.