Have you ever sat in front of a stack of loan application papers, pen hovering above the final page just waiting for your signature, and wondered, “How is this lender ever going to decide how much money I can borrow?”
You are not alone. Many conversations with our customers are rooted in confusion about a lender’s decision regarding their auto loans. Your credit score will play a key role in the rate you’ll pay for your loan, and while it is based on the information in your credit report history, there are other determining factors that lenders rely on to tell them about who you are. Here’s what you need to know:
The C That Impacts Everything
Most lenders evaluate four factors, often referred to as the “Four Cs of Credit,” when reviewing your loan application. These are character, collateral, credit score, and capacity.
With identity theft on the rise, you probably have a watchful eye on your credit, and if you have ever applied for a loan of any kind, you know collateral is important. But while you can ask for a pay raise, get a second job, or eliminate debt to impact your capacity, it is the character aspect of credit you have the most control over. It’s also the factor that is revealed in all the other Cs of credit, whether you like it or not.
What is Financial Character?
Character, and more specifically financial character, refers to your financial reputation. When reviewing your loan application, lenders look at your financial history to determine whether you are a good investment. A financial history with many years of on-time, “paid as agreed” reports tells the lender you can be trusted to pay off your loan. In this case, your character is an asset to the lender. Years of late payments and pending concerns, however, indicate your character is a risk for your lender.
It’s the Other Cs That Tell
Unfortunately, character cannot be measured on any scale. It is open to your lender’s opinion and interpretation. Why, then, is character so important? Essentially, character is directly reflected in each of the other three Cs of credit, which are measurable. Credit scores, collateral, and capability are what lenders refer to as your character’s “tells.”
Your credit report is a timeline for your financial past, and your score is a grade. Collateral reveals what is important to you. Capacity, often the most heavily weighted factor, reflects your ability to earn money and indicates your ability to pay off the loan you are asking for. Each of these says something about your character, whether it is considered favorably on its own or not.
Build Character Assets Lenders Love
Who are you as a borrower and a bill payer? Looking back, is your financial past characterized by consistent regularity and paying in full or by spotty successes and partial payments? If your past isn’t characterized by what you’d like it to be, it’s time for a change. These simple steps reflect four characteristics that would be assets to any lender:
Be Strategic. A budget is really just the practice of setting and meeting financial goals.
Be Responsible. Paying your bills on time only requires one positive character trait.
Be Trustworthy. Use your credit for things you can afford, then pay them off in full every time.
Be Reliable. Implement these financial practices, and do them again and again. It shows!
Start building these character traits into your financial reputation now.
Regardless of how the lender evaluates your character when you apply for a loan, these four assets will be reflected and measured in your credit score, collateral, and capacity. They may even contribute to a financial character in you that’s your lender’s deciding factor in whether or not to loan you money.
After all, getting the loan you need is the end game, and developing a positive financial character — though subject to interpretation — is the key to making that happen.
Jennifer Bonessi is a member of the DailyWorth Connect program. Read more about the program here.