There are many factors to consider before any lending institution grants you a loan. You might have heard that your credit score plays an important factor. But did you know that your income plays a part in it too? Other factors need to be considered, such as your debt to income ratio, the value of your collateral, and your downpayment size.
Lenders are typically firm with their standards and regulations in lending money, and they’re not only looking at one factor. Thus, we’ll discuss why your income, employment history, credit score, and other factors play a significant role whenever you borrow money and why lenders look at these factors carefully.
Reason 1: Lending companies use them to gauge if you’re a responsible borrower.
The top reason your income or, let’s say, your monthly gross income is considered when you file for a loan is because lending companies use it as a threshold of your capability to pay your monthly repayments. This explains why most loan applications require you to fill in the details regarding your salary and other financial resources.
If you have a sufficient income and cash flow, this will let the lenders know that you are fully capable of returning the money you owe them, the right amount paid on the scheduled date. But if your income is questionable, this might compromise your application as this poses a high risk to the lenders.
Reason 2: Lending companies use these factors to determine how much money you’re entitled to borrow.
Have you ever wondered why some lending companies, especially online lenders, have those questions regarding your monthly income rate? This is all because they have a system bracketing that will determine the amount of debt you can take on according to your monthly income.
For some lenders, this is a safety precaution to ensure the borrowers only get what’s within their budget and income capacity. Some lenders practice this especially for first-time borrowers, but over time, with continuous and consistent on-time repayments, borrowers are granted higher money to borrow.
Reason 3: Acknowledging your monthly income helps you make wise and smart decisions.
This reason is particularly personal for every borrower. If you know your monthly income, you can weigh things and budget your finances that will lead you to make a wiser and smarter decision.
If your monthly income allows you to spare a dedicated budget to cover your loan’s monthly repayments, you don’t have to worry about other expenses. It means you have acknowledged that you’re already capable of handling additional expenses without compromising your other financial responsibilities.
Suppose you are already firm that your current financial status allows you to cover additional expenses. In that case, you can confidently apply for a new loan now and be confident enough to face any lending officer with your request.
Credit Score Versus Your Income
Now that you know the most basic reasons your monthly income is an important factor every time you borrow money, let’s briefly discuss one of the most intriguing questions: What is more important: your credit score or income?
Many borrowers overlook that these two factors are both significant, and one can’t be taken with less value than the other. Credit score holds a significant value because it’s the basis of many lenders to see whether you’re eligible for a loan with low interest or not. Your credit score will also show if you’re a reliable payer and does not pose a high risk to the lenders.
A good credit score allows you to enjoy more benefits and gives you many advantages when you borrow money. In contrast, a bad credit score still allows you to borrow money, but you face higher interest rates and a more stringent application process.
There’s no direct correlation that your income affects your credit score; however, in some parts, your income contributes to achieving a good credit score. If you have a steady income source, your credit score will not be greatly affected since you are eligible to pay your dues on time. To ask which is more important, whether your credit score or your income, we say BOTH.
Summary
A monthly income is what many individuals have as a source of finances, lucky for some who have other resources such as business and other money ventures. But for many, income plays an important part in their finances, so lending companies consider this as well in borrowing money. Steady income will show credibility from the borrower. Also, it shows their capacity to make repayments.
However, we must not forget that credit score and other factors such as employment are also considered when you take out a loan. Thus, make sure to keep the cash flow steady and keep a good credit score all the time. It ensures that you will get to enjoy the advantages whenever you file a loan in the future.