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Credit Decisions: It's More Than Just Your Score

Michael Jones

Auto Loan Expert

When you apply for a loan, it is no secret that lenders review your credit score before making a decision. What you may not realize is that your credit score is just the tip of the iceberg. Lenders like to take a look at an applicant’s full financial profile before they decide whether or not to approve a loan application. They also consider this same information prior to assigning an interest rate.

How Lenders Evaluate Your Loan Application

Your credit score provides lenders with a quick snapshot of your credit history. While some lenders may make their decision solely based on this number, many will still conduct a thorough examination of your full credit record. Here are some things they may look for:

  • Missed payments
  • Delinquent accounts
  • Current or past bankruptcy
  • Unpaid collection accounts
  • Outstanding debts
  • Hard credit inquiries
  • Civil judgments, foreclosures or unpaid tax liens

Having one or two of these issues may not prevent them from approving your loan, but it may have an impact on your rate. Here are some other factors that lenders look at:

Your Monthly Cash Flow

If you have a higher income, lenders may view you as less of a potential risk. More income means that you are more likely to pay all of your bills each month. On the same note, higher income may not get you a better rate in cases where your monthly expenses are very high. As a general rule, your debt-to-income ratio should not exceed 43% if you want to secure a loan with a trustworthy lender.

The Terms of the Loan

Lenders often favor a longer loan term because it provides less time for a default. With this in mind, you can likely get a better interest rate on a 15-year mortgage than a 30-year mortgage. Although a shorter term may mean a higher monthly payment, you will pay a lot less interest over the duration of the loan. As an added bonus, you will be debt-free sooner with a shorter loan term.

The Size of Your Down Payment

When it comes to securing a loan, size matters. A larger down payment helps lower the overall amount of your loan. When you put down a big down payment, your lender is more likely to offer you a better interest rate. If your credit score is in-between two ranges and may prevent you from qualifying for a loan, a larger down payment may be the push you need to get your application approved.

If you have limited savings, getting a lower interest rate may not be worth tying up all of your cash. In the event of an emergency, you may need to be able to access those funds.


When applying for a home or auto loan, the item you are purchasing serves as collateral for the loan. This means the lender will closely examine the value of the item prior to issuing the loan. For example, if you purchase a vehicle for $25,000. You may choose to add an additional $5,000 for an after-market warranty. This puts your loan-to-value ratio at 120% ($30,000 / $25,000 = 1.2). This means that in the event that you default on the loan or your vehicle is totaled, they are unlikely to recover the full amount of the original loan. For this reason, the lender is more likely to charge a higher rate to make up for the risk.

By pledging the item you plan to purchase as collateral, you may be able to get a lower rate. This type of loan, also known as a secured loan, allows the lender to take possession of the collateral in the event that you fail to make payments. Keep in mind that you should always exercise extreme caution when using your home or vehicle as collateral to secure a personal loan. In the event that you default on the loan, you may lose the item you pledged.

Employment Record

If you are attempting to borrow a large sum of money, your income alone may be good enough to qualify you for a reasonable interest rate. Before approving your application, some lenders may opt to review your record of employment from the last two years. This will help them determine how stable your income is. If you have recently been unemployed or have gaps in your employment history, this may be a huge red flag for a lender. While this may not stop you from getting approved for the loan, it can lead to a higher interest rate.

Cash Flow

When you take out a loan, there is an expectation that you will use your monthly income to repay it. In addition to your salary, some lenders will want to make sure that you have enough liquid assets to cover the payments in the event that you lose your job. These assets may include stocks, savings, money market accounts or bonds. If you have enough of these assets to cover the total cost of the loan, the lender may see you as less of a risk and offer a lower interest rate.

Improve your chances of getting the best car loans with the best possible loan terms by improving your credit behaviors. This means making timely bill payments, keeping card balances low and not borrowing more credit than you truly need.