Three Lenders, Three Different Offers – Here’s Why
When you apply for a loan, not all lenders evaluate whether you’re approved or denied by the same standards. This discrepancy may determine whether you’re approved for the loan and, if so, what terms you’re offered.
How am I Evaluated Differently?
You’re evaluated by a lender based on three main factors:
- The financial criteria the lender uses.
- The lender’s loan portfolio needs.
- The lender’s organizational philosophy.
The Financial Criteria the Lender Uses
A loan is a risk taken on by the financial institution. They agree to provide you money while taking on the risk that you might not pay it back. To balance this risk with their need to make a return, every lender must figure out the likelihood that they’ll get paid back.
Credit Score is Only One Factor
Many people understand their credit score plays a part in whether they’ll be approved for a loan but, what they don’t often realize, is that it’s just one of many financial factors lenders consider. The Five C’s of credit are evaluated through different parts of an application process and can look beyond your credit score.
- Character – Your credit score indicates your character to a lender. It shows how often you make payments on time and how many accounts you have in good standing.
- Capacity – Your ability to repay the loan. Typically, this will include an examination into your debt to income ratio, which is the amount you currently owe versus how much you bring in each month.
- Capital – The amount of cash or liquid assets you’ll have after taking on a new loan.
- Collateral –What asset you’re using to secure the loan. This is what the lender could seize if you neglected to pay it back.
- Conditions – The conditions of a loan, such as its interest rate and principal amount influences the credit union’s desire to fund the loan. Conditions may include both internal and external factors such as the state of the economy, industry trends or pending legislative changes.
The Lender’s Portfolio Needs
Lenders cannot have an infinite number of loans in their portfolio. In the case of a bank or credit union, the dollar amount they’re allowed to loan out is partially dependent on the amount of deposits they have. Given this restriction, financial institutions have targets for the proportion of their total portfolio they allocate to different types of loans, interest rates, and risk profiles. The approval of your application might be looked at through the lens of these targets, making it more or less likely to be approved.
The Lender’s Organizational Philosophy
Up to this point, all the criteria for approval and evaluation have been fairly concrete. Does the organization believe you’ll pay them back- yes or no? Does the organization need more of the types of loans you’re applying for – yes or no? Beyond that, a portion of the consideration comes down to organizational philosophy.
Loan Committees Sort Out the Grey Areas
Most financial institutions have a loan committee that evaluates certain types of loans. While an auto loan probably wouldn’t be reviewed by the loan committee, a large business loan or some mortgages might. The loan committee looks at the application and determines whether the institution should approve it.
Sometimes Saying No is the Nicest Thing
WECU takes many factors into consideration when approving a loan. As we are not-for-profit we aren’t just thinking about revenue for the Credit Union, we want to ensure to put you in a sound financial position.
Understanding How You’re Evaluated Can Make You Better with Credit
The next time you’re ready to seek credit, knowing how lenders work may help you decide who you should work with, how to get approved, and what to do if you’re not.