Lenders will look at a variety of data points when making a decision about whether to extend you a loan. Chief among these are your credit score and history, your employment status and your debt-to-income ratio. For your credit history, lenders may look at the length of your credit history, the number of delinquencies, charge-offs or bankruptcies in recent years and the number of credit inquiries you’ve had over the last year. Many lenders will want to see a credit history of at least one to three years with no bankruptcies within the past one or two years.
Another factor lenders consider is your employment status and history. Some lenders will require that you provide proof of income, whether through full- or part-time employment or self-employment. Other lenders may also require a minimum personal or household income to apply, with minimums frequently between $20,000 to $40,000 per year. If the lender has these requirements, you’ll be expected to provide documentation that shows proof of your employment and income.
Debt-to-income (DTI) ratio is another important measure that lenders will use to evaluate applicants. Your debt-to-income ratio is the amount of debt (including mortgage or rent payments) you carry relative to your pre-tax monthly income. If your DTI ratio is 40%, this means that your monthly debt payments account for 40% of your pre-tax monthly pay. In general, lenders will want to see applicants with DTI ratios under 35% to 45%. A DTI ratio of 50% or more is typically a bad sign to lenders, as it means you may have trouble paying back your debts.
The length and amount of the loan will also affect your interest rate. Typically, longer terms and higher loan amounts will mean higher APRs.