Lenders are generally running a business. In any business, the main objective is to gain profit or at least break even. This is why lenders usually may not approve loans to applicants that they consider to be high risk. Of course, lending their money to anyone may be risky but they usually may try to minimize the risk. Prior to approving or denying a loan application, lenders almost always may need to see the applicant's credit reference. Basically your lenders may conduct a research of your financial background to determine whether they are likely to get back their money again or otherwise. Based on their evaluation, if they consider you to be a high risk applicant they may either deny your application or approve it with a higher interest rate.
A credit reference may not be limited to your credit scores and ratings alone. Creditors may look into your savings and checking account to determine whether you have sufficient income to repay the debt. Generally they may do this by calculating your debt-to-income ratio. If the ratio is high they may impose a higher interest rate on your loan and vice versa. This is why creditors may ask you to list the sources of your income and your other debts so that they may determine your credit capacity. Basically if you earn $ 4,000 a month and you spend $ 3600 of it to pay off your other debts and living expenses you may only be left with $ 400. This means that creditors may only extend a loan to you with a monthly payment of not more than $ 400. If the amount is lower than their minimum monthly payment requirement they might not approve your loan at all.
Your credit card report may also play a huge role in determining your eligibility for a loan. Creditors can generally tell whether you might be a good paymaster from the behavior of your credit cards. If you have been consistently paying your credit card debts without any late payments creditors may see this as a good behavior. They would know that you are disciplined enough to ensure that your debts are paid on time. Bad credit card behavior may cause creditors to require that you put collateral such as a house, a car or mutual funds on the loan that you are applying for. This is because if you suddenly default on your loan payments, creditors may hold your collateral as theirs until you pay them off. If you fail to do so they may sell your house, car or mutual funds that you put as collateral. So it may be important that you make sure that you pay your credit card debts consistently and not just pay off the minimum required payment.
Creditors may obtain the information they need from your credit report and score. Everybody has his or her own FICO score and the number may influence creditors' decision. Your report may contain information such as monthly payment status, credit limit and credit history. A high FICO score may indicate that you are financially stable and may be able to pay off the loan that you are applying for. Of course, your FICO score may be based on your previous financial activities because the information that makes up your FICO score is generally based on the information provided by your previous creditors and lenders. This is why you may want to consider checking your credit history every once in a while so that you may know what to do in order to improve your credit scores for future financial activities.
In general your creditors may base their decisions on your credit history, credit behavior and the level of risk that you pose to them. Low risk applicants may generally be awarded with low interest rates. Therefore it may be a good idea for you to take the necessary steps to improve your credit score prior to applying for a loan from a new creditor.