How Lenders Decide Your Eligibility
Ever wondered why some loan applications sail through while others get stuck? If you've ever been puzzled by what's going on behind the scenes, you're not alone. Lenders use a mix of complex numbers, risk assessments, and even your habits to figure out whether you're a good bet. Let's unpack how they do it — step by step — so you know exactly what's being judged when you hit "apply."
Your Credit Score
Think of your credit score as your financial “reputation” in numbers.
It's based on your borrowing and repayment history. In most cases, the higher the score, the better your chances of approval, and the better the terms you'll be offered.
What Lenders Look For:
Payment history: Have you paid past loans and bills on time? Even one missed payment can lower your score.
Credit utilisation: This is how much of your available credit you’re using. Keeping it under 30% is a good signal.
Credit mix: Having different types of credit (like a mortgage, credit card, and personal loan) shows you can handle varied obligations.
Length of credit history: The longer you’ve been using credit responsibly, the more data lenders have to trust your track record.
Example: If you have a score of 780, pay your credit card in full each month, and rarely use more than a third of your available limit, lenders will likely see you as low risk.
Your Income And Employment Stability
A lender wants to be sure you can pay back what you borrow. Your income is the most straightforward proof.
But it's not just how much you earn — it's also whether that income is stable.
What Lenders Check:
Current job status: Full-time roles are often viewed as more secure than part-time or temporary work.
Employment history: Staying with one employer for years can work in your favour. Frequent job changes may raise questions.
Type of income: Salary, self-employment earnings, or commission-based pay can be weighted differently based on reliability.
Example: A teacher with a fixed salary might be seen as more predictable than a freelancer with fluctuating monthly income, even if the freelancer earns slightly more overall.
Debt-To-Income Ratio (DTI)
This ratio compares your monthly debt payments to your monthly income. It informs lenders how much of your income is already committed.
Why It Matters: A high DTI indicates that you may struggle to take on additional debt without financial strain.
Example: Let’s say you earn $4,000 a month and your monthly debt payments (like rent, car loan, and credit cards) add up to $1,200. Your DTI would be 30%. Most lenders prefer to see it below 36%, though some mortgage programs may allow more.
The Loan Amount And Purpose
The size of the loan you’re asking for — and what you plan to use it for — shapes how a lender sees the risk.
Minor, short-term loans are generally approved faster if your credit and income meet the mark.
Large, long-term loans (like mortgages) involve more scrutiny, often requiring more documents and checks.
The purpose of the loan matters too. A loan to consolidate existing debt may be seen differently from one for a high-risk business venture.
Example: Asking for $5,000 to renovate your kitchen with steady income and a low DTI is an easier sell than seeking $100,000 for a startup when you have limited business history.
Collateral And Security
Some loans are secured by collateral — an asset the lender can claim if you don’t repay. This lowers their risk.
Common Examples Of Collateral:
A home (mortgage)
A car (auto loan)
Savings or investment accounts
If your loan is unsecured (like a personal loan), the decision is primarily based on your creditworthiness and income.
Example: Offering your car as collateral for a $10,000 loan may get you approved even with a slightly lower credit score, because the lender knows they can reclaim value from the car if needed.
Your Banking And Spending Habits
Some lenders — especially those you already bank with — will review your account activity. They can spot patterns that automated systems might miss.
They Might Look At:
Consistent deposits (paychecks, client payments)
Regular savings activity
Overdraft history
Large, unexplained withdrawals
Example: If your account shows a steady paycheck every two weeks, regular bill payments, and some money left over each month, that’s a sign you manage your cash flow well.
Existing Relationship With The Lender
Having a history with the lender can work in your favour. If you've had an account with them for years, paid off a previous loan successfully, or maintained a healthy balance, they may be more willing to approve your request.
Some lenders even have relationship-based rate discounts for loyal customers.
Example: A bank might approve your small business loan partly because you’ve kept your checking account with them in good standing for over a decade.
Documentation And Verification
Even if your numbers look good, lenders want proof.
You might need to provide:
Pay stubs or tax returns
Bank statements
Identification documents
Proof of address
Sometimes the approval process stalls not because of your finances, but because documents are incomplete or inconsistent.
Tip: Make sure your application matches your supporting documents exactly — even minor errors in address or name spelling can cause delays.
Market Conditions And Lender Policies
Even perfect applicants can face rejection if market conditions are tight. Economic downturns, rising interest rates, or shifts in lending policies can make lenders more cautious.
Example: During an economic slowdown, a bank might temporarily raise its minimum credit score requirement from 650 to 700 for certain loans.
What You Can Do To Improve Your Chances
If you’re not meeting a lender’s criteria yet, you can take steps to strengthen your application:
Pay bills on time for several months to boost your credit score.
Reduce outstanding debt to lower your DTI.
Build a stable work history.
Start a savings habit that shows you can manage money responsibly.
Consider applying for a smaller loan or offering collateral.
Getting Ready To Apply
Before sending in your application, put yourself in the lender’s shoes. Would you lend money to someone with your financial track record? If the answer is “maybe” or “not yet,” work on shoring up weak spots first.
Being prepared with the correct numbers, documents, and mindset can make all the difference between an easy approval and a frustrating rejection.