There is a lot of information needed to make a loan decision; a lot of information from a variety of sources. Knowing exactly what information lenders need will help you prepare for when you are ready to approach a lender with your desire to obtain a loan. It will also help you to start preparing some of that information now; some documentation will take years to get in order if there are issues with them currently.
Credit
This is the starting point for all loan decisions. Lenders will request a copy of your credit report and your FICO credit score. This score is determined by a number of factors on your report and represents your credit worthiness. On a scale from 300 to 850, people with low scores will find it more difficult to obtain a loan, or find their interest rates higher than those with better scores. Higher scores, usually above 700, will have an easier time with the approval process; they are also given lower interest rates.
This is why you need to stay current on any debt you have. Falling behind on your payments can adversely affect your credit. Negative reports remain on your credit report for seven years, hurting your score for seven years. If you get to the point where bankruptcy is your only way of clearing your debt, just know that it will cripple your credit for ten years! This will make it nearly impossible to receive a loan or other forms of credit for several years following the bankruptcy. Don’t let it get to that point; stay on top of your debts!
You should also ensure that the information on your credit report is accurate. Any account that does not look familiar should be investigated. It may be an old account that had been paid off but not reported as such. Scary to think about, but it could be an account that was opened in your name by someone who stole your identity. In either case, dispute such accounts with both the lender and the credit reporting agencies until they are cleared up.
Supporting Documentation
Whether you are taking out a secured loan (one in which you will be asked to put up collateral) or an unsecured loan, you will have to provide a number of documents and information to the lender. These are required for identification purposes as well as credit eligibility.
A photo ID such as a driver’s license or state-issued ID will visually confirm to lenders who you are. It will also provide them with an address for them to send communications through the postal service. You may be asked for additional documentation proving the address on your ID is your current one. Usually two different utility bills are sufficient for this purpose. You will also be asked for contact information beyond your physical address. Email addresses are used for communication as well as billing purposes for those borrowers who decide to go paperless. Phone numbers have an added function. They are compared to the telephone numbers listed on your credit report. If a lender sees too many different phone numbers in your recent credit inquiries, they may become skeptical of your trustworthiness.
Contact information for your employer will be requested as well. This is so lenders can verify that the information you provide them is accurate, and goes hand-in-hand with any proof of income forms you have supplied them with. Proof of income can be in the form of check stubs, your two most recent ones for most creditors, and tax returns. The type of loan being sought and the individual lender will determine how many years of tax returns will be sufficient.
If you do not qualify for a loan then it may be necessary to have a cosigner help you. This is a person who is willing to sign on the loan with you; taking on the responsibility of the loan should a borrower fail to pay on it according to the terms of the loan. Everything mentioned above will also be needed for any cosigners on the loan.
Collateral
Secured loans are loans that require collateral. To reduce the risk of loss, a lender may require you to secure the loan you are requesting with some form of personal property. This could include physical property like jewelry, vehicles, or equipment; but it could also include more liquid assets such as stocks, bonds, CDs (certified deposits), or savings accounts. Basically, anything of value that can be converted quickly into cash, typically within a few months, can serve as collateral.
Mortgages, business loans, and some car loans will require borrowers to put up collateral. With personal loans it depends on the lender. Smaller-amount loans are less likely to need collateral while some banks will want to use the money in your savings account (assuming you have an account with that bank) to secure a loan.
If you are planning on using options in your investment portfolio as collateral, be aware that there might be issues with them. Stocks are traded at lightning speeds and the value of those stocks can fluctuate just as quickly. It then becomes tricky for lenders to secure a loan with stocks because of the constantly-changing value. It is also important to note that some forms of investments cannot be used as collateral because of various laws and IRS rules.
Cash advance loans and payday loans operate under the premise that your next paycheck is the collateral. These come with such high interest rates that a borrower could become dependent on repeating the loan once it is paid off. Be wary of these type of loans; they could prove beneficial for an immediate need but not a good option in the long-term.