What lenders expect from borrowers

When applying for a loan, lenders assess several factors to determine whether a borrower is creditworthy and likely to repay the loan on time. Understanding what lenders expect can significantly improve your chances of getting approved and securing favourable terms. Here’s a breakdown of the key factors that lenders typically look for from borrowers:

1. Creditworthiness and Credit Score

One of the primary things lenders evaluate is the borrower’s credit history, reflected in their credit score. A strong credit score shows that the borrower has a history of repaying debts responsibly, while a low score may indicate a higher risk of default.

- What Lenders Expect: A solid credit score, typically above 700, for more favourable terms. Borrowers with poor credit scores may still qualify for loans with higher interest rates or additional requirements.

- What You Can Do: Maintain good credit by paying bills on time, reducing outstanding debt, and checking your credit report for errors before applying for a loan.

2. Repayment Capacity

Lenders want to ensure that the borrower has a steady income and the financial capacity to repay the loan. They assess your debt-to-income ratio (DTI), which measures your monthly debt payments relative to your income.

- What Lenders Expect: A stable and sufficient income to cover the loan repayments, along with other existing obligations. Typically, lenders prefer a DTI ratio of 40% or lower.

- What You Can Do: Provide proof of income, such as salary slips, bank statements, or tax returns, and try to lower your existing debts before applying for a loan.

3. Business Performance (For Business Loans)

For businesses seeking loans, lenders will evaluate the performance and financial health of the company. This includes analyzing the company's revenue, profitability, and cash flow.

- What Lenders Expect: A profitable, growing business with stable cash flow. Lenders will typically ask for financial statements, tax returns, and business plans.

- What You Can Do: Prepare detailed business financial documents, show evidence of profitability, and demonstrate how the loan will contribute to growth.

4. Collateral

For secured loans, lenders often require collateral (such as property, equipment, or inventory) as security for the loan. Collateral reduces the lender's risk since they can seize the asset if the borrower defaults.

- What Lenders Expect: Valuable assets that can be used as collateral, such as real estate, vehicles, or business equipment. Lenders also look for assets that are easy to sell or convert into cash.

- What You Can Do: Provide clear documentation of your assets and be prepared to offer something of sufficient value to secure the loan.

5. Loan Purpose

Lenders will often ask borrowers to explain why they need the loan and how they plan to use the funds. The purpose of the loan gives lenders an idea of the borrower’s seriousness and planning.

- What Lenders Expect: A clear and legitimate reason for borrowing, whether it's for expanding a business, purchasing equipment, consolidating debt, or making a large purchase.

- What You Can Do: Clearly articulate your loan purpose and explain how the funds will benefit your financial situation or business growth.

6. Stability and Consistency

Lenders value stability, both in personal finances and business operations. They prefer borrowers who have steady employment or business income and have been in the same job or industry for a reasonable amount of time.

- What Lenders Expect: Consistent work history, preferably with the same employer or in the same field for at least a few years, and a stable business track record for business loans.

- What You Can Do: Highlight your job stability or business continuity, and avoid major financial changes before applying for a loan.

7. Down Payment or Equity Contribution

For loans such as mortgages or business expansion loans, lenders may require the borrower to contribute a down payment or equity. This shows the borrower’s commitment to the loan and reduces the lender's risk.

- What Lenders Expect: A reasonable down payment (usually 10-20% for home loans) or an equity contribution for business loans.

- What You Can Do: Save for a down payment in advance, or be ready to invest some of your own capital into the project.

8. Debt Repayment History

Lenders will review your history of repaying debts. They want to see a strong track record of paying on time and in full, especially for similar types of loans.

- What Lenders Expect: A history of consistent, timely payments for loans and credit accounts. Late payments, defaults, or bankruptcy can significantly affect your approval chances.

- What You Can Do: Demonstrate a history of reliable debt payments and avoid late payments or accumulating large amounts of debt before applying for new loans.

9. Guarantor or Co-Signer (If Required)

In some cases, especially when the borrower has poor credit or lacks sufficient collateral, lenders may ask for a guarantor or co-signer who agrees to take on the debt if the borrower defaults.

- What Lenders Expect: A guarantor or co-signer with good credit, stable income, and a solid financial history.

- What You Can Do: If required, find a trusted individual who is willing to vouch for you by acting as a guarantor, and ensure they meet the lender's expectations.

10. Legal and Regulatory Compliance

For business loans, lenders will verify whether the business complies with local laws, tax regulations, and industry-specific standards. They may also check if the borrower has outstanding legal issues or tax liabilities.

- What Lenders Expect: Compliance with all relevant legal and regulatory obligations, and no outstanding legal disputes or tax arrears.

- What You Can Do: Ensure your business or personal finances are in good standing with regulatory authorities, and address any legal or tax issues before applying for a loan.

Conclusion

Lenders evaluate various factors before approving a loan, including the borrower’s creditworthiness, income stability, collateral, and financial history. To improve your chances of getting approved, focus on building a strong credit profile, maintaining a steady income, clearly defining your loan purpose, and ensuring compliance with legal requirements. Meeting lender expectations not only increases your approval odds but can also lead to more favorable loan terms, such as lower interest rates and longer repayment periods.