What do lenders look for beyond your credit score?

Your credit score is the primary factor most lenders use when approving you for a loan. But other financial factors matter, too.

Lenders commonly consider income, current debts and employment. Some lenders make lending decisions based on your broader financial profile and history.

What do lenders look for when approving loans?

What do lenders see on your credit report and financials? Lenders tend to use the following factors when deciding whether to approve your application.

Income and employment history

Employment and income verification are important because you need money coming in to cover the loan payments. With online lending, there’s also a need to protect the lender (and the borrower) from identity theft.

Income verification generally means providing pay stubs or a W-2. If you’re self-employed, income verification may include providing the lender copies of your past years’ income tax returns.

Why lenders care: Lenders want to confirm that you have sufficient income to repay the loan.

Banking relationships

A lender may want to review your bank statements to check your cash flow. An existing relationship with a bank could improve your chances of approval, especially if you borrow from that bank. Lenders also consider mortgages and other active loans during the approval process.

If you plan on taking out a loan secured by a certificate of deposit, the lender will want to see proof of that account’s balance.

And, of course, lenders want to know you have a bank account you can use to deposit funds and make payments.

Why lenders care: Lenders want to see that you have other resources to pay your loan if you encounter financial challenges, such as a healthy savings account.

Debt-to-income ratio

In addition to your income, a lender will look at your debt-to-income ratio or DTI. Your DTI is the percentage of your pre-tax earnings that goes toward paying debts.

Ideally, your DTI should be below 36 percent — even after you add the payment for your new loan. However, some lenders accept DTIs of up to 50 percent.

Lenders check for mortgage or rent payments, minimum credit card payments and auto, personal and student loan payments.

Why lenders care: Your DTI is the main way a lender determines if you have enough money left over monthly income for a loan payment. You won’t be eligible to borrow if you have too much debt compared to your income.

Liquid assets

Lenders don’t always consider liquid assets, but you may be able to include them as proof of your ability to make payments. You can sell off stocks, government bonds and money market accounts quickly if needed.

That means you may qualify for a loan even without a high income or a low DTI.

Liquid assets can also be useful if you don’t have a regular source of income, like if you are a gig worker or freelance. They could cover the cost of a loan if your income drops. Having them could let you get a more competitive rate.

Why lenders care: Liquid assets are a way for lenders to confirm you can pay your loan if you lose employment or experience another major financial setback.

Collateral

Some types of loans, like auto loans and home equity loans, require collateral. If you do not pay your loan, the lender can take what you used as collateral. In other words, you put your property on the line.

If you choose a loan with collateral, also known as a secured loan, your interest rates will likely be lower than other loans and credit cards. Secured loans pose less risk to the lender and more risk for you if you default.

Why lenders care: Lenders care about their ability to recoup losses if you default.

Joint borrowers or co-signers

Some lenders allow you to apply with someone else as joint borrowers. When you do, both you and your co-borrower have shared responsibility for the loan. You also share the loan funds, so joint borrowers typically have shared finances.

Some lenders allow you to instead add a co-signer. Your co-signer will be responsible if you can’t make payments, but they won’t be able to use any loan funds.

This is especially useful if you have limited credit history or a bad credit score. If you sign the loan with someone in a better financial situation, the lender may give you a better interest rate. You may be able to avoid a bad credit loan.

Why lenders care: When you have a creditworthy co-borrower or co-signer, a lender may be more willing to approve your application. That’s because more than one individual is financially responsible for repayment.

Education

The US Bureau of Labor Statistics (BLS) reports that one’s income and job stability increases significantly with education level. Because of this, lenders may take your education into account when you apply.

It is rare to find, but there are options. Lenders like Upstart offer relatively competitive rates and will consider your education.

Again, it’s uncommon. Lenders may consider it part of the bigger picture, but your education may not be the deciding factor in approval.

Why lenders care: Some lenders believe data points such as college degrees or field of study indicate that an applicant is less of a risk for default. Statistically, certain applicants are more likely to have steady employment or income based on their degrees.

The bottom line

Your chance of being approved for a loan depends on several factors. Consider the full scope of your financial situation before deciding on a lender or applying. It is usually a good idea to review your credit report, compare personal loan interest rates and pay down your other debt before you apply.