It is customary practice to approach a bank or other lending institution when needing a loan. However, before approving your loan application, a lender will look at several factors to assess your creditworthiness and determine whether you can repay the loan.

Five Factors Lenders Usually Look At

When deciding whether or not to grant a loan, financial institutions will follow certain criteria to determine your eligibility. If you know the criteria banks and other lending institutions use to evaluate applicants, your chances of being granted a loan can be improved. With the help of loan origination software, lenders will typically take into account the following five factors:

Credit Rating and Background

Your credit score and credit history are major considerations for lenders. The likelihood that you will fulfill your loan obligations is measured by your credit score and record of responsibly managing your credit. Applicants with credit scores of 700 or higher are typically more attractive to lenders. A loan approval might still be possible even if your credit score is below 700, but you might have to deal with higher interest rates and stricter terms.

Earnings and Prior Work Experience

It’s important to show that you’re employed and making money regularly for lenders, which aids in their analysis of whether you can repay the loan. Income documentation such as W-2 forms, tax returns, and pay stubs may be requested when applying for a loan.

The Ratio of Debt to Income

Lenders also look at the proportion of the monthly expenses you can afford to pay back. Your debt-to-income ratio reveals how much money you owe compared to what you make monthly. Most lenders prefer borrowers with a debt-to-income ratio of 36% or less. Loan approval is still possible even with a high debt-to-income ratio, but you should expect to pay higher interest rates and adhere to more stringent repayment terms.


Secured loans, for example, can only be given out if you have something of value to use as collateral. One way to guarantee a loan is to put up some collateral with the lending institution, and the lender has the right to take the collateral if you default on the loan. Real estate, cars, and valuables are typical forms of collateral.

Motivation for the Loan

Finally, lenders think about why you need the money. Mortgages and auto loans, for example, serve distinct purposes and may have additional stipulations. The requirements for some loans, like personal loans, can be more loosely set, but they often come with higher interest rates.

Approaching Lenders and Negotiating Interest Rates and Other Terms

Loan terms and interest rates can be negotiated with lenders to help you get the best deal when you need money. Read on for suggestions to consider when approaching lenders for lower interest rates and improve loan terms.

Do Your Research

Research is essential before beginning negotiations with a lender. Investigate the rates of interest and repayment terms offered by competing lenders for loans of a similar nature. Learn more about the rates and terms that are available to you.

Get In the Negotiating Mindset

Get in the mindset of haggling when approaching a lender. Loan companies compete for borrowers’ business, so they might be flexible on interest rates and other terms if it means getting your business. However, if the terms offered are not in your favor, you must be ready to back out.

Know Your Credit Score

When calculating your interest rate, your credit score is a major factor. Know your credit score and how it will impact the loan terms before starting negotiations. Applying for a loan might be risky if you have a low credit score, so working to improve your credit score first could be a good idea.

Request a Lower Interest Rate

When negotiating loan terms, asking for a lower interest rate is a powerful bargaining chip. Interest rates are negotiable and could be reduced if the borrower has a high credit score and a stable financial history. Bear in mind that some lenders may require collateral or other security measures to offer a lower interest rate.

Rethink Your Loan Term

Shortening the loan term is another option to save money during negotiations. Loans with shorter terms typically have lower interest rates, which can help you save money in the long run. However, shorter loan terms typically result in higher monthly payments, so calculate your budget carefully before signing any paperwork.

Have a Backup Plan

Be ready to walk away if the lender is unwilling to budge on the loan terms. You can easily find a lender more accommodating to your needs among the many that exist. Don’t cave into a lender who pressures you to accept terms that are not in your best interest.

Options for Borrowers With Bad-Credit 

Traditional financing options, such as bank loans, can be difficult to obtain with imperfect credit. Borrowers with bad credit shouldn’t despair; there are other ways to secure financing. Look at these potential solutions:

The Concept of P2P Lending

In peer-to-peer lending, borrowers seek funding from a network of individual lenders rather than a bank or other centralized lending institution. Through peer-to-peer lending platforms, borrowers can find investors willing to lend them money at reasonable interest rates. Peer-to-peer lending can be an attractive option for borrowers with poor credit because its requirements are typically less stringent than traditional loans.

Cooperatives of Financial Services

The members of a credit union share in the institution’s ownership and the profits are returned to the members. They provide the same services as conventional banks but at cheaper rates and with fewer fees. Financial cooperatives are more likely to work with borrowers with low credit scores, and they may provide additional assistance in credit-building services. 


Microloans, or small loans, are available through community development financial institutions and other non-profits. These loans are made available to help small businesses and startups who may not be able to get conventional bank loans. Microloans are small, short-term loans with looser credit requirements and repayment schedules than conventional loans.

Credit with Collateral

Collateral, such as a car or a house, is used as security for a loan in a secured loan. Lenders are more likely to work with borrowers with low credit scores if the loan is secured. However, the lender can take back the collateral if you default on a secured loan.

Borrowing Funds with a Credit Card

It’s possible to get a cash advance with a credit card. Cash advances aren’t the best option if you can avoid them, but they might be a good option if you need cash quickly. Avoid damaging your credit score by making timely repayments on credit card cash advances.


You can increase the likelihood of getting a loan if you know what information lenders consider before granting them. If you are having trouble getting approved for traditional loans, you may want to look into other financing options. Either way, you should be prepared to provide additional information and documentation.