How Lenders Evaluate High-Risk Low-Income Borrowers

High-risk borrowers and low-income borrowers face more obstacles in getting loans. Not only are they charged higher interest rates, but they cannot borrow as much money either.

If you are a borrower with bad credit, no credit, or simply have a low income, here are key points that banks consider when they look at your loan application. By knowing what factors can hurt your chances of getting a loan, you can take steps to correct the problems.

Payment History

Paying your bills on time, every time, will make you a better candidate for a loan. If you pay your utility, phone, cable, or credit card bills more than 30 days late, the accounts may temporarily go into collection, which may be recorded on your credit report. Even paying your rent late could affect your credit if your landlord supplies this information to a credit bureau.

Employment History

Filing an income tax return every year will improve your chances of securing a loan, even if you are self-employed for a period of time. Unexplained gaps in employment for unmarried borrowers will raise questions. (If you are married and at least one of you was employed at any time, employment gaps are less of a worry.) Other factors that banks consider are how much your household income has increased over time. If you have moved into better paying jobs over the years, this will work in your favor.

Outstanding Debts and Loans

Even if you stay current on your other loan payments, banks may question your ability to pay off another loan. Borrowers who have outstanding car loans and credit card balances should pay off these smaller loans first before approaching a bank for another loan.

Debt to Earnings Ratio

The ratio of how much you owe to how much you make is a major consideration for lenders. If you already owe $10,000 and make $40,000 a year, your have a relatively high D/E ratio and banks will be skittish about lending you even more money. Even though $40,000 is larger than $10,000, you must still pay for food, housing, transportation, and healthcare, which reduces the actual amount of money you can spare to pay off debts.

Bank Customer History

When applying for loans with traditional banks, you should approach institutions where you already have accounts in good standing. Suppose a potential lendee maintains a checking and savings account at a local bank and has never had a negative checking account balance, and has never dipped into the savings. Such a borrower demonstrates good financial habits, and even if he is an otherwise high-risk or low income borrower, the bank may look favorably on his habits as a customer.


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