Spring is in the air! At this time of year it’s always nice to take a little time for refreshing the wardrobe that we’ve been recycling all winter long. New colors, more vibrant patterns, and lighter fabrics are all in order. New threads don’t always come cheap and, if you’re not careful, you could end up with a lot more than just new clothes this season.
Lenders are not charity organizations. While purchasing a few items to make you feel pretty may sound like a good idea, wisdom would suggest that relying on credit to finance this shopping excursion is certainly not the best way to go. Lending institutions are in the business of making money. Therefore when a lender loans money to a client, they do so with the expectation that they will collect more in return. Your creditworthiness is determined by your ability to pay back money that you have borrowed within the time frame that was agreed upon. Lenders have specific criteria they consider each time they determine whether or not to loan out money to a new borrower.
The first criteria is credit. In simple terms, credit is how faithful you have been in paying your past debts. By accessing your FICO score, creditors are able to see a snapshot of what your past financial behavior is like. As with most things, past behavior is a great predictor of future behavior. If you want to be perceived as creditworthy by lenders now and in the future, make it a priority to exhibit good financial practices and responsible behavior when it comes to the money you earn, borrow, and owe.
Save Now, Play Later
Establishing and maintaining healthy credit is a ticket to opportunity. Good credit provides access but in most cases it will only be extended when the borrower has proven to be worthy. Lenders give credit where credit is due and are careful to avoid overextending to the wrong type of client. Following the tips above will put you in a position to prosper.
Credit Capacity
The amount of money you earn, owe, and how much you own determine your capacity. Capacity is your ability to pay back your debts. When you are being considered for a new loan, the lender will want to ensure that your income is more than enough to support what you plan to borrow. Lenders often use your DIT (debt-to-income) ratio to determine what you can reasonably afford to borrow. The amount of money you owe each month compared to the amount of money you bring in each month can be calculated by dividing your total monthly debt payment by your total monthly income. Anything less than ten percent will show that you can comfortably afford to pay what you owe. The average home loan or mortgage requires a ratio of approximately 36% or less where total monthly debt does not include the cost of housing.
Multiple Streams of Income
Asking a lender or creditor to invest in you before you have invested in yourself is not likely to result in approval. Before you consider applying, be prepared to show how you have taken some personal risk to acquire or at least prepare for the asset you are requesting funding for. Whether it’s a new car, home, or business you will need to be prepared to submit some form of down payment. This down payment is known as capital.
Promises, Promises, Promises…
Lenders want more than a promise of repayment when they loan out money, they want a “guarantee”. Collateral serves as a guarantee to repay what you borrow. When a lender loans you money they want a way to make sure they will get it back. Your collateral serves as an alternative source of repayment. This alternative source can come in many forms. Sometimes it comes in the form of a co-borrower or co-signer, this is someone who promises to repay the loan if you can’t, won’t, or just don’t. Collateral can also be real estate, assets, or business equipment. Not all loans require a collateral, but many substantial loans do.