Taking Out a Loan? Lenders Are Not Just Looking at Your Credit Score

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Need a personal loan? Read on to see if having good credit is enough to land one. 

When you have a need to borrow money, whether to fix up your home or start a small business, you may be inclined to look into a personal loan. This can be an especially cost-effective move if you don’t have home equity to borrow against.

What makes personal loans so convenient is that they allow you to borrow money for any purpose. When you sign a mortgage, for example, you can only use your loan proceeds to finance a home purchase. But with a personal loan, you can use your proceeds however you want.

However, unlike mortgages, which are secured loans, personal loans are unsecured. Because of this, you’ll often hear that you need to have good credit to qualify for a personal loan — or at least one with a reasonable interest rate attached to it.

But having good credit may not be enough to get a personal loan. Your lender might also be interested in other factors relating to your financial situation.

It’s not just your credit score that matters

It’s fair to say that lenders rely very heavily on borrower credit scores when giving out personal loans. But that’s not necessarily the only information they look at.

A report by SFGATE says that some lenders use alternative data to determine borrowers’ creditworthiness. A lender you apply with might, for example, look at your bank account balance to see how much money you have in there. Or, it might look at your bank account transactions to see if you’ve been consistently paying your bills.

This trend apparently started as a way to help consumers and expand access to credit, since a credit score alone doesn’t always tell the whole story. But in some cases, it could make it harder for you to qualify for a loan.

For example, say you’ve been living at home with your parents and therefore have not had many bills in your name, like rent or utility payments. If a lender were to check your bank account history, they might not see the stream of consistent payments they’re looking for.

Now ideally, in that situation, a strong credit score would suffice in convincing a lender to give you a loan. But you never know.

How to increase your chances of getting approved for a personal loan

When it comes to setting yourself up to qualify for a personal loan, the best advice is still really to maintain a high credit score, or boost yours to get to that level. But paying your bills on time is also good advice, because if you can establish a pattern of on-time bill pay, it might sway a personal loan lender to approve your application.

Of course, timely, consistent bill payments and strong credit go hand in hand. Your payment history carries more weight than any other factor when calculating your credit score. But it’s good to be aware of the fact that these days, your personal loan lender might seek to look beyond that number before deciding you’re eligible to borrow money.

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