Before you pursue a loan through a reputable online lender, it helps to know what they look for when they’re deciding to approve or decline your application. Most applicants wonder how their bad credit score will impact things, and lenders know this. In fact, an entire industry of loan products has grown around this common problem of poor credit. Borrowers feel hopeful when they search for loans online and see the words “no credit check.” This begs the question: if a lender is not looking at my credit, how do they decide to approve or decline my loan application? Most reputable lenders verify three basic things before approving a loan: your identity, your banking information, and your income.
In all three cases, they typically require you to fax or scan and email documents such as a driver’s license, your most recent bank statement, a voided check, and your most recent paycheck stubs. Some lenders offer the loan without requiring you to send documents. Instead, they might verify your employment by calling your workplace or they will obtain bank information by collecting a fax directly from your bank.
Regardless of how the lender gets the needed information, the underwriter wants to know that you are not stealing someone’s identity, that your checking account is active, and that you have a job or some kind of entitlement (i.e. Social Security) that pays you regularly via direct deposit. Many online lenders require that you have a certain amount of income per month, typically around $1000 minimum. If a lender does not have this kind of requirement, then they might limit the loan amount to not exceed thirty percent of your monthly income, for example.
The bottom-line for every lender is risk. You might be approved with a low monthly income, but your lower income presents a greater risk to the lender. This means higher interest rates and a lower loan amount approved. Collateral can play a role as well. If they require collateral, such as a car, this reduces their risk and helps you get approved or obtain a lower interest rate.
You might have noticed that the beginning of the article mentions “reputable” online lenders. The online lending industry is massive and, despite government efforts, remains unregulated. Here are some tips to avoid the pitfalls:
–Avoid online lenders that are not licensed by a state. Every state sets its own rules for how much lenders can charge in interest and how much they can loan. Unlicensed lenders have unethical practices, from charging exorbitant interest rates (i.e. 300%) to automatically withdrawing unexpected fees from your bank account. Search online for “state licensed online lenders” for more information.
-Avoid online lenders that ask for your bank account only and no other pertinent information. This is a red flag for unethical lending. It might even be a scam.
-Do not use online lenders for anything other than short-term loans. Regardless of which lender you choose, online loans are expensive. Only borrow one if you have a plan for paying it back quickly, and obtain as much information about the lender as you can before applying. Search the Better Business Bureau online. Make sure the online lender has a verifiable address and a customer service number that actually works.