When you borrow money, whether it's to buy a house, refinance an existing property, buy a car, furniture or apply for credit cards, lines of credit, it makes sense that you would want THE best rate. I mean, who wouldn't?
But the truth is…
Not everyone can qualify for “The Best Rate”, and YOUR best rate may not be THE best rate...
Applying for credit is similar to getting insurance…the higher the risk, the higher the rate.
There are different factors that determine the rate offered to a particular borrower and lenders have a system to establish the creditworthiness of potential borrowers, it’s called the 5Cs of Credit.
This system not only helps lenders decide whether or not they will finance a loan or give credit, but it also helps to calculate a borrower’s best rate and the conditions of the loan.
The 5 C’s of Credit
Character: The applicant’s credit history.
This information is collected from the major credit reporting agencies including Equifax and TransUnion. The reports contain information such as how much the applicant has borrowed in the past, if they repaid debts on time, if they have late payments, collections, bankruptcy, consumer proposals, liens and so forth.
Capacity: The applicant’s ability to repay the loan.
Lenders use the debt-to-income ratio (DTI) to help determine whether of not a new borrower can carry more debt. They calculate the DTI by dividing the total monthly debt payments by gross monthly income. Every lender differs in their acceptable DTE, but the lower the better. Lenders may also consider time at current job, if it’s full-time, number of years in the industry and the job stability
Capital: The amount of money the applicant has left over after taking out a loan.
Lenders want to see that borrowers still have money or assets that can be liquidated into cash, should they need it. They don’t want to see folks with all their money tied up in their debt…it’s a greater risk if something should happen…something goes unpaid.
Collateral: Assets that can back or act as security for the loan.
For example a car is the security for a car loan, a house is the collateral for a mortgage. Collateral gives a lender a greater sense of security, should a borrower default on payment the lender can repossess the car or the house.
Conditions: The influencers that determine the lenders desire to finance the loan.
Conditions may include the purpose of the loan, the amount of the loan and the interest rate. There may also be influencers the borrower has not control over such as the cost of living, the economy and so forth.
As you can see there are many factors that determine the rate available to you but the bottom line is...
… if you are seriously looking to apply for a loan or credit, make sure the rate you’re getting is specific to you, and based on your specific details. When you have this information it’s much easier to determine your next steps.
Knowing your rate may determine whether or not you postpone a purchase or take actions to put yourself in a better position to borrow.
Until next time...
Have a fantabulous day and let your awesomeness shine!
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