Years before I got into lending, or banking for that matter, I was just as curious as anyone about “Credit” and how to get approved for a loan. In fact, I myself walked to work several miles each morning and afternoon in the Louisiana heat because I could not get approved for a car loan nor did I know where to start!
This article gives no promise or certainty of approval odds; however I personally believe that if you follow this advice, you will drastically improve your chances!
Lending Is All About Risk
“Yes, IF” & “No, BECAUSE” are two very common responses to a loan request. ‘Yes’ along with it’s contingent stipulations for the approval to stand, or ‘No’ with it’s reasoning behind why the loan must be declined. We as consumers find ourselves in a defensive position when trying to obtain loans without understanding the why and how behind the decision making process.
DEFINITION of UNDERWRITERS: the person/software/group behind the scenes reviewing the application and deciding whether to approve or decline it.
“Yes, IF”…. & “No, BECAUSE”….
What is “Credit”?
Credit is a term used in varying circumstances, from varying angles, but generally refers to the reputation of a Borrower and the good faith and trust that takes place when a Lender gives or at least considers giving that Borrower a loan. Credit is also what results from the responsible repayment of that debt.
The criteria by which they determine the eligibility of said loan can include but is not limited to: income, longevity of employment, value if collateral (if present), history with other lenders, and in most cases the actual numeric credit score itself from one or more of the credit reporting agencies. Lenders use this and other criteria to determine the level of risk involved in giving out the loan.
“3 trade lines with over a year of history on each…”
Building enough credit history is often a person’s first taste of the seemingly Catch 22 aspect of Credit Building. You are told that you “must have credit, to get credit” which paradoxically leaves us wanting and wondering what the heck to do next! I too wanted know exactly what is enough and finally found out.
Since an Underwriter’s job is to review the content of your credit report, he/she must have enough content to gauge and deduce your level of financial responsibility by the history of how you’ve paid others. That being said, a young person starting off from ground zero will have absolutely nothing in their report when they begin. So what can that person do to get a car loan or a credit card if no one will give them a chance.
Well, first it should be noted that some certain lenders will offer specific loans designed to help First Time Buyers to obtain a car loan even if they have no other loan history. These loans are usually quite strict requiring provable income with time requirements on employment, certain sizes of down payments, maximum amounts financed, etc. The benefits for those that qualify for such programs is they are able to fast track their growth in the arena of Credit Building.
When I became a loan officer the first thing I did was call and underwriter and ask her: “How much is enough credit?” She replied to me something along the lines of saying that if a person were to have at least 3 loans, of different types (ex. Installment and Revolving), with at least 12 months of history on each, that she would then have enough to go on to make a decent underwriting decision. MEANING: Having a least that much history will allow an Underwriter to gauge risk and look at how responsible of a borrower you have already been thus far.
If you need help building credit see my other post: Credit 101: The 5 Factors
For those in which this is not an option, then applying for a small loan amount (personal loan $300-$500 or credit card will < $750 limit) and paying both responsibly over time will render the similar results. Remember the goal here is to be able to say you’ve had 3 trade lines, for at least 12 months each. After that, you are out of the “Limited Credit” bubble and instead can be judged more fairly. At that point underwriters will not-so-simply be asking ‘can you afford the loan?’ and ‘how much have you borrowed before?‘.
“some certain lenders will offer specific loans designed to help First Time Buyers to obtain a car loan even if they have no other loan history.”
Secured vs Unsecured
Perhaps some of you have had that thought; “to apply for a small amount to test the waters and prove yourself,” but were declined. Obtaining a secured installment loan or a secured revolving trade line may be the reasonable alternative. Obviously if it is an installment loan (i.e. Personal Loan, Secured Loan, Auto Loan, etc) you simply need to make on time payments. What’s most important is that if it is Revolving, meaning it has a Credit Limit: Never Exceed Half.
DEFINITION of UNSECURED: Having no collateral for recourse or repossession if the loan borrower were to default and fail to repay.
DEFINITION of SECURED: Having some form of collateral for the lending institution to hold onto or repossess if the loan borrower to default and fail to repay. Common types of collateral are Savings Accounts, Vehicles, and other pieces of Property.
“…If it has a Credit Limit: Never Excede Half!”
That said here are your 2 scenarios:
Scenario #1: get a loan that you use the funds from the loan to make the payments on the loan itself. The point of the loan is literally just to prove that you can borrow something and pay it back responsibly over time; so don’t pay it off immediately. Stretch the loan at least 6 to 12 months depending on the amount. If you are declined ask for a smaller amount, and if the amount is not the issue then secure your approval with collateral. (Ex: $500 in a savings account to Secure a $500 loan.)
Scenario #2: get a Credit Card with the specific goal of activating it and either not using it (0% Utilization Percentage), or if the goal is to get a mortgage down the road then use it for the pettyest of amounts so you can show that you do in fact use the card, but not enough to get yourself into trouble. If you are declined ask for a smaller limit, and if the amount is not the problem then secure your approval with collateral. (Ex: $500 frozen in a savings account to secure a $500 credit limit. No, the amount does not matter as far as credit building.) **If this is the route you go then you need to read my other articles: Limit Utilization Percentages
The S.A.W. Method
I’ve found that as a loan officer, getting others approved, is extremely helpful in showing me how to get approved. By that I mean that if you can flip the script, and pretend that you are the underwriter or loan officer taking your own application it’ll open your eyes to things about your situation that you can tweak or fix to increase your chances of being approved. One tried and true saying that I was told back when I first got into lending is to “see what they S.A.W.”
When reviewing loan applications to this day I’m often subconsciously looking for these 3 things:
- STABILITY:
- ABILITY
- WILLINGNESS
**Please send me your suggestions for topics you would like covered down in the comments below.**
Josh Romine
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