The 4 Keys to Obtaining a Loan
You want to get a loan and want to maximize your chances? Prepare your file meticulously. Here are the 4 main factors that a potential lender will consider before granting your wishes.
1. Your level of debt
The level (or ratio) of debt, calculated as a percentage, is the only factor that takes into account your income and therefore your actual repayment capacity. Obviously, it’s impossible to repay $2,000 per month on a loan if your income is $2,500! And maintaining a debt level of over 40% is considered problematic, while a level of 30% or less is seen as excellent. But what exactly is the debt ratio? Here’s an example.
Calculating the debt ratio
André and Hélène, both retirees, own a condo. Together, they withdraw $6,000 per month (before tax). They have the following monthly payments to cover their debts:
|Mortgage (including insurance and property taxes)||$1,850|
|Total monthly payments||$2,550|
Therefore, André and Hélène’s total debt ratio is $2,550 (total payments) ÷ $6,000 (total income) x 100 = 42.5%. This is higher than the recommended ratio.
Do you want to measure your debt ratio?
It’s simple: visit myratioendettement.com.
2. Your credit score
Your credit score is the score assigned to you by Equifax and TransUnion (see the article “What is a Good Credit File?“). These 2 credit bureaus know everything about your financial condition! Based on your economic profile, they establish your score on a scale from 300 to 900. The closer you are to 900, the lower the risk you represent to your lender. And based on your score, your creditor will determine the interest rate you will have to pay.
3. Your credit rating
The credit rating, also accessible through Equifax and TransUnion, measures your repayment habits for each of your debts. This rating, ranging from 1 to 9, is established by each of your creditors. A rating of 1 means you pay within 30 days, while a rating of 9 indicates that you are in collection or have moved without informing your creditor of your new address… Once you reach a rating of 3, lenders become concerned to the point that they could refuse you a loan. Unfortunately, the rating that appears on your file is always the worst one issued… Know that it will remain on your record for a period of 6 years. You can obtain your credit rating for free by consulting Equifax.ca or TransUnion.ca.
4. Your employment stability and place of residence
Lenders, as we know, value stability! In fact, a creditor is more likely to grant you a loan if they consider you a stable and predictable person. Have you held the same job and lived in the same residence for several years? Your lender is reassured: your source of income seems secure, and you’re less likely to disappear if you fail to make payments! Your stability, therefore, becomes a favorable factor in attracting your creditors.
By taking these 4 key factors into account, you will increase your chances of success when applying for a loan. The key is to keep a close eye on your finances. Only borrow when it’s truly necessary and, most importantly, within your repayment capacity.
Don’t miss our next article, where we will discuss the elements considered in establishing your credit score and provide valuable advice to improve your credit history.
The Jean Fortin & Associates Team
For a debt-free future!