Millions of young adults, middle-aged adults, and seniors apply for loans every year. The financial landscape is highly varied. It includes dozens of different loan types, sizes, and purposes. Hopeful applicants fill out paperwork to get money for college, a new car, a first home, and so many other things. While many differences exist among loan types, lenders, and borrowers, several common factors stand out.
Nearly every lender uses information gathered from credit bureaus to decide whether to approve a particular applicant’s request for funds. For those who previously borrowed to pay for a college degree, refinancing a year or more after graduation can cut monthly payments significantly. Likewise, those who intend to borrow need to have favorable debt-to-income ratios. Other helpful factors for applicants are low credit card usage and substantial down payments. Consider the following details.
Credit Scores Play a Central Role
There are three major credit reporting bureaus, all of which play a decisive part in the ability of consumers to get approved for financing. By law, Experian, TransUnion, and Equifax must provide each person with one free report per year. It’s essential to request the reports and check them for errors. Also, read them closely to get a feel for where you stand regarding borrowing potential. Nearly all lenders use one or more agency scores to calculate their applicants’ creditworthiness.
It’s Smart to Refinance Student Loans After Graduation
Refinancing student loan debt is a solid and savvy financial move for working adults who are currently making payments on existing education loans. Because their credit scores are higher than when they first applied for financing, they can now refinance one or more loans into a completely new agreement that comes with reduced monthly payments and more favorable rates. Additionally, borrowers who refinance can get more time to pay and other preferential terms. Unlike other kinds of borrowing, college and graduate school debt can come with large balances and longish repayment periods. So, refinancing can go a long way to reducing the financial impact of payments for graduates who are just starting out in a career.
Debt-to-Income Ratio Matters
One of the crucial elements of a lender’s evaluation process is the DTI, debt-to-income ratio. Generally, any number below 40% is considered acceptable, depending on the lender, the reason for borrowing, and other factors. Calculate the number by dividing total debt by income. If you pay $250 on personal loans, $1,500 on rent, and $250 on a car loan, then you’d divide $2,000 by your income. Assume it’s $5,000 per month. The DTI would be 40%, or 2,000/5,000. A lower DTI is better than a high one.
Down Payments are Game Changers
Consumers prefer to make low down payments, when possible, but the practice is not a wise one. Amounts paid upfront never accumulate interest and serve to reduce the total amount that is subject to interest. In other words, every dollar of a down payment works doubly hard to take the sting out of a given debt. For long-term obligations like mortgages, this principle is even more important.