Simply, lending companies evaluate their loan applicants based on several widely accepted factors. And they categorized their loan applicants based on the outcome of their evaluation.
Loan applicants should know a little bit about the different factors used in credit evaluations. The most important factor is his or her credit history – whether or not they have made the required monthly payments for their existing or previous loans on time, missed monthly loan payments, or defaulted on their loans.
A borrower’s employment history is also a factor lenders also use to evaluate their loan applicants. The more stable an applicant’s employment history: number of years employed at their current employer, and number of years employed in the same line of work the more likely it is an applicant will have a steady stream of income for the foreseeable future to meet his or her financial needs.
Another factor lending companies use to categorize a loan applicant’s ability to repay his or her loan is their debt-to-income ratio, or DTI. It calculates what percentage of a loan applicant’s monthly income is used to pay for existing monthly bills.
Personal Loans and Bad Credit
Lending companies summarize their evaluation of the loan applicant through different interest rate offers. When a high-risk borrower applies for the same loan as a low-risk borrower, lending companies will offers the high-risk borrower a higher interest rate for the loan; it’s called a risk premium. It says certain borrowers are more likely than others to make late payments or miss their payments, and the companies have to offset the risk with a higher rate of return.