One of the main things that set private lenders apart from traditional lending sources is the fact that private lenders do make loans to people with bad credit. However, since a private lender is taking a big chance by making a loan to a bad credit borrower, they have several other important things they take into consideration. They normally conduct a risk assessment on their potential customers to see if it’s a good idea to approve the application. The Rules of Thumb blog from MoneyThumb has listed below the main concerns private lenders have about bad credit borrowers:
Credit History
All the credit bureaus available today have a copy of everyone's credit file. Basically, this file contains lots of information about your financial history which can give insight into your usage of credit cards and spending habits, short-term loans as well as long-term loans.
The moment you submit your loan application, a private lender will pull a report about your financial profile from the credit bureaus as well as other sources in order to know who they are dealing with. The different credit bureaus may have varying details about your credits but only to a certain degree. This means that all of them will have identical basic information about your borrowing habits and all the financial institutions that have given you a loan. Most importantly, they will indicate how you have handled the payments in the past. Normally, the credit score is a numerical indicator of the level of risk that you carry.
Collateral
A loan can either be secured or unsecured. This means that you need some sort of collateral before a private lender agrees to make a loan. The current value of the asset in question must be evaluated to determine if it matches the requested amount. If there are some outstanding debts collateralized by the same asset, the lender will subtract the amount from the calculated value in order to determine how much money you can get.
Good collateral gives the private lender some level of assurance that you are committed to making the loan payments. In the event where you default, they can seize the asset and recoup the loan.
Capital
Most private lenders will look at how much you have contributed to an investment that is pushing you to borrow. If the capital contributed is high, there is a high probability that you will do everything in your power to pay back the loan since you don’t want your investment to sink.
A bad credit borrower with a good amount of working capital is much more likely to receive a loan from a private lender. As far as private lenders are concerned, capital investment is a good indicator of a serious client who is willing to hold their end of the deal.
Income Level
The borrower’s capacity is all about your propensity to repay the loan as agreed. To determine this, your income levels are scrutinized to find out if there are excess financial obligations eating into your income.
Here, the debt-income ratio is quite important and it plays a major role during the borrowing process. In most cases, the length of time you have spent in your current position will be looked at in a bid to determine if your job is stable or not. If you are dealing with a credible private lender, they will want to ensure that you can afford to borrow the amount you have applied for.
Prevailing Financial Conditions
The ease of getting a loan from a private lender will be influenced by the prevailing financial situation. To illustrate, it might be harder to get a loan even from a private lender during an economic recession. Basically, the risks are higher during volatile times and the cases of defaults are quite high.
By taking into consideration the above concerns of private lenders when it comes to bad credit borrowers, there is a greater chance a loan will be approved.
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