Why do we so often feel apprehensive when faced with the prospect of having to obtain financing? Whether it be for a new car, to buy real estate, or simply to fund a vacation – the art of obtaining financing has long been something that seems to have its own set of rules and laws. But does it need to be that way? Perhaps not, if you follow a few fundamental tips when applying for a loan.
To determine whether or not you qualify for a loan, many lenders will evaluate you by a mysterious point system. To make it even more of a mystery, they keep their rating systems close to their chest, so it can be hard for you to determine whether or not you’ll get the credit you’re hoping to.
Your salary or income will be taken into consideration. Your level of income may help you to pass the credit test, but you shouldn’t assume that it will automatically mean you are able to borrow any set amount. Income does not make you credit worthy, and lenders will assess your credit history before approving you.
You can be pretty well assured that you’ll be scored on the number and types of existing loans and credit cards you have. In fact, one of the ironies of obtaining financing is that it is a lot easier to do so once you’ve already used other types of credit. The most highly desired options for establishing a credit rating are travel and entertainment cards, followed by bank credit cards and department store charge cards. It is also helpful for you to have established a consistent record of paying your bills on time and card installments on time. You should eliminate any credit cards you have that you don’t use because lenders could interpret your long list of cards as meaning that you have the potential to run up a lot of debt. You should be aware that traditionally lenders will take closer notice if you have a history of using finance providers for credit. Finance providers are known to carry a significant percentage of clients who present higher credit risks than most banks will accept. However, if you do have financing with an outfit such as this, and you have a solid payment history, you shouldn’t lose any additional points.
Also taken into account will be your current financial commitments. A rule of thumb guideline is that if more than 35% - 40% of your gross income goes into paying off current debts, including mortgage and auto loan payments, lenders are not likely to approve your application. In general, you are better off if you own your home rather than rent, and if you already have a savings or checking account (with a positive balance!).
In most countries, you are entitled to obtain a copy of your credit report if you are refused financing. Mistakes have been known to happen, so you may need to clear them up and re-apply. Or you could go to another lender. Each one has its own minimum standards, so you may find one that is prepared to take a greater risk in order to provide finance. Finally, if you are one of the fresh-faced, new to the credit world order, here are some tips you can take to establish a credit rating:
- Open and use a checking account
- Start a savings account and make regular deposits (and minimum withdrawals!)
- Join a credit union where you work
- Take out, use and repay promptly your bills on a department store credit card. Tip: Department store cards are usually easier to acquire than bank and credit cards, which generally require you to earn a certain minimum salary, and also have several other credit requirements.
- In some countries, you can open a ‘secured’ credit or bankcard account, where you deposit funds into an account, and can operate a credit card from those accounts. Often 6-12 months of solid and reliable usage with one of these cards will be sufficient to establish a credit rating.
In many cases where obtaining financing is required, it is important that your attorney and accountant are involved from the start. Contact us if you’d like some assistance in determining how best to apply for financing, and to ensure that all the necessary steps are covered.