The 4 elements considered when applying for a loan

A loan refusal is not only difficult to handle in terms of your self-esteem but also significantly harms your credit report and deprives you of your purchase or the realization of your project. Here are the 4 key elements that your financial institution will analyze to determine the outcome of your loan application:

The debt ratio is the first factor considered by your financial institution and the only one that takes your income into account. It evaluates your ability to repay your debts. If your debt level is too high, the institution will deny your loan application to avoid over-indebtedness risks, even if you’ve always paid your bills on time.

Results
30% or less = Excellent
31% to 35% = Good
36% to 39% = Average
40% or more = Problematic

DID YOU KNOW?
You can measure your debt ratio using our online tool.

Your credit score, which ranges from 0 to 9, is assigned by creditors for each of your debts. The score displayed on your file is always the worst assigned to you, and it remains there for 6 years. This score is usually preceded by a letter describing the type of credit (R = Revolving credit, I = Installment credit, O = Open credit, M = Mortgage)

Example: Jacques forgot to pay a cellphone bill for 95 days. This debt will have a score of “4” for the next 6 years, even if he pays on time afterward.

Payment Delays
1 = Less than 30 days
2 = 30 to 60 days
3 = 60 to 90 days
4 = 90 to 120 days
5 = More than 120 days
7 = Payment arrangement
9 = Collection agency, untraceable, etc.

DID YOU KNOW?
Lenders start worrying from a score of “3.”
You can get your credit report for free at Equifax.ca or TransUnion.ca.

Your credit rating is calculated by Equifax and TransUnion based on the following factors, in order of importance:

1. Your payment habits for each debt (delays = bad)
2. The balance owed compared to the credit limit (less than 35% = ideal)
3. The number of years each account has been open (longer = better)
4. The number of new credit inquiries (many = bad)
5. The number and types of creditors (a balanced mix, e.g., 1 credit card, 1 loan, 1 line of credit = ideal)

Example: Marianne always pays her debts on time. The balances on her credit card and credit line never exceed 35% of the limit. Her score is 750. André, on the other hand, is sometimes late and fully uses 3 credit cards. His score is 620.

Financial institutions will hesitate to lend to André, who is frequently late and maximizes his available credit, unlike Marianne.

DID YOU KNOW?
Credit scores range from 300 to 900.
Most Canadians have a score of 750 or higher.
A score of 680 or more generally indicates an “acceptable risk,” increasing the chances of getting a loan.
Get your score for free at Equifax.com or TransUnion.ca.

Lenders value stability and predictability, both at work and at home. Someone who has been working at the same place for years is less likely to lose their job and is therefore considered a lower risk. An exception is made if you change jobs to improve your working conditions. Similarly, someone who has lived at the same address for a long time is perceived as more stable and easier to contact in case of non-payment.

TIPS: Maintaining a low debt level, using a variety of credit types wisely, and repaying debts on time every month are great ways to maintain a good credit file and protect your borrowing capacity. Lastly, remember that just because an institution is willing to lend to you doesn’t mean you should borrow!

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee