In this brief guide we will answer the question “.What do banks look at when applying for a personal loan”.

The factors below are what most banks will look at when you apply for a personal loan but these are also factors you must consider before making a personal loan application.

What do banks look at when applying for a personal loan?

When applying for a personal loan banks will usually look at the below things;

  • Age
  • The amount you are borrowing
  • The type of personal loan
  • The purpose of the personal loan
  • Loan term
  • Down Payment
  • Identification, income & tax documents
  • Type of employment
  • Registered address
  • Disposable income
  • Lifestyle expenses
  • Committed expenses
  • Debt to income ratio
  • Fraud checks
  • Assets & collateral
  • Credit score & history

Age

Some bank lenders consider the age of the borrower and if you are too young (below 21) or above 60 then you may find it harder to get a personal loan from certain lenders.

The amount you are borrowing

When you apply for a personal loan, banks will usually first look at the amount you are requesting for the loan.  Most banks will have a limit as to what can be classed as a personal loan and if you need an amount higher than this then you may need to get a secured loan.

Personal loans are usually unsecured loans, which means they are not secured on any assets such as a house, car or jewelry.

In some cases, banks will place a charge on assets if the borrower is deemed as a high risk borrower due to creditworthiness issues or the personal loan amount is quite high. 

The type of personal loan

When applying for a personal loan, banks will also look at the type of personal loan you are applying for and this could greatly change your affordability for the product.

As mentioned above, personal loans could either be secured or unsecured.

A secured personal loan is one that is secured on assets of the borrower and this loan may be more favourable to banks as they will have an asset which they could liquidate if you default on the personal loan.

On the other hand, unsecured personal loans are not secured by any assets and hence if you should default on the personal loan the bank will have to go through so much effort in order to recoup the loan balance from you.

The purpose of the personal loan

When applying for a personal loan, the banks will also look at what you are applying for the personal loan for.

Whilst this is usually not a major game changer, each bank will have their restrictions on what you could take out a personal loan for.

E.g some banks will not lend to customers who want to use the personal loan to pay off any other debts such as credit cards, mortgages , car finance etc.

Loan term

When applying for a personal loan the bank will look at the loan term to determine if you can indeed afford to borrow and repay the loan over such a term.

The longer the loan term, the higher the risk for the bank.

Don’t be incentivised by the lower monthly payments on offer for a longer loan term, the reality is that the risk of defaulting on a personal loan increases as the term increases.

There is more time for life events to unfold. A new child perhaps or maybe you lose your job.

Down Payment

When looking to apply for a personal loan the bank will look at the amount you are putting down as a downpayment for the loan(if a down payment is at all required).

If a down payment is required and you are able to meet those requirements easily then you are likely in a better position to get approved for the personal loan with the bank.

Identification, income & tax documents

When applying for a personal loan, the bank will want to verify your identity and to do this they may require youtube scan over your passport, drivers license, bank statements and tax documents.

Some of these documents will have your date of birth, house address and full name.

The bank will check to ensure your address is the same on all documents and your date of birth and age are the same.

Your income and tax documents may also be used to verify your income information.

Due to the rise of various identity verification methods you may find that banks will no longer require you to scan over your passport details as they can now identify you using various third party software.

Type of employment

When assessing a borrower’s application for a personal loan, banks will usually check the nature of the borrower’s employment.

Banks will want to see that you have a stable job with a stable income which is paid regularly.

If you are self employed and your income is unstable then you may find it much harder to get a personal loan.

You may want to consider going to a credit broker who could advise you on what the best personal loan options could be.

If you have been employed a long time then the bank is more likely to lend to you as you have a long employment history

Registered address

When applying for a personal loan , the bank will check to verify your registered address as these are part of the compliance checks it must undertake as a responsible lender.

You may be asked for your bank statements or utility bills in order to verify your house address but most banks now work on a paperless basis and will identify your house address with the information on your credit report.

Banks will expect that you have at least lived at the address for a minimum of 3 months but the longer, the better.

Disposable income

When you apply for a personal loan, the bank will work out your monthly disposable income to figure out how much you could possibly afford in monthly loan repayments after considering your committed expenses and lifestyle expenses.

If your disposable income will not comfortably cover your monthly loan repayments then you may find it hard to get a personal loan from the bank.

Lifestyle expenses

When you apply for a personal loan, the bank will check your lifestyle expenses.

Lifestyle expenses are the expenses that we can do without, such as gym expenses, restaurants, cinema etc

If your lifestyle expenses are so high and even higher than your committed expenses then the lender may view you as a potential risk,except your disposable income is large enough.

Committed expenses

WHen applying for a personal loan, the bank will look at your committed expenses. Your committed expenses are the expenses you must pay each month.

This could be loan repayments, tax repayments, rent etc.

Debt to income ratio

The debt to income ratio is another metric that banks will look at when you apply for a personal loan.

There are various numbers quoted as the minimum debt to income ratio a personal loan lender will accept but there is no real way of knowing.

A sensible guide is to have a debt to income ratio of no more than 36% if you have an average or below credit score and 50% if you have a very good credit score.

Fraud checks

When you apply for a personal loan the bank will carry out fraud checks to ensure you are not known for fraudulent financial activity.

In the UK, CIFAS keeps a record of those who have committed fraudulent financial activity but the process by which this data is collected is not very clear and there may be a lot of people who have been incorrectly marked with a CIFAS flag.

Assets & collateral

When applying for a personal loan, the bank will usually check to see if you have any assets and make estimations on their value.

If you have substantial assets then this will mean that if you lose your job you may still be able to maintain the monthly repayments on your personal loan by selling some of your assets.

If you are applying for a secured personal loan then the bank will look to confirm the value of your collateral and ensure you are actually the owner.

This is important in case the bank has to take possession of the collateral and liquidate it as a result of you defaulting on their personal loan.

Credit score & history

When you apply for a personal loan the bank will check to see your credit score and history.

The longer your credit history is, the better.

Your credit score and history are in so many ways one of the most important elements of your personal loan application.

A person with bad credit such as the below will almost certainly always find it harder to get approved for a personal loan and if they do it will likely be with higher APRs.

  • CCJs
  • Bankrutpcies
  • Debt relief orders
  • Home repossessions
  • Defaults
  • Individual voluntary arrangement
  • Missed repayments etc

How to improve your credit score

You can improve your credit score by doing the below things but you should be aware that improving your credit score will take at least a few months.

Open a bank account or credit account

The simplest thing you can do to establish or improve your credit score is to open a bank account or any other credit account. 

By opening a bank account you open an account which gets reported to the credit bureaus as an account on your credit report.

The longer you have this account open for the longer you will have a credit history. It usually takes 3 years from you opening an account which gets reported on your credit file before you will have any credit history which can be seen by others.

Opening a bank account also allows you to have an account on your credit file with a verified home address. This means it will be easier for you to access credit products in the future.

A bank account might also be the easiest way to a credit card as banks are more willing to offer credit cards to account holders as they can view your account history and see how credit worthy you are even if you have a low credit score.

Ask your bank for a small overdraft facility

To Build credit you need credit so one of the ways to improve your credit score or build credit is by having an overdraft. You then need to show good behaviour when you have access to this credit.

By asking your bank to give you an overdraft facility you will have a credit account open on your credit file which boosts your credit score. 

You will also have the ability to use your available credit, sticking to the 30% maximum credit utilization golden rule per credit account and thereby showing good credit behaviour which should boost your credit score even further. Always repay your overdraft as soon as you can to avoid any fees.

Get a Household Utility in your name

Some utility accounts are now being reported on your credit file and having one in your name is a very good way to improve your credit score. This means that your payment history on your gas, electric and telephone service will affect your credit score.

By getting yourself named as the account holder on these services you can establish and improve your credit score if your bills are paid on time and there are no balances or defaults on the Utility account. 

If you live in a shared accommodation be sure to avoid any disputes and get payment for utilities well in advance so as to avoid any of your house mates holding you hostage and ruining your credit file.

Do you live with your parents? Ask them to put your name, date of birth and address on the utility bill. This will open a new account on your credit file and ensure you begin to get credited for the regular payments being made on the account.

If payments are missed on the account this could negatively affect your credit score so you must ensure payments are not missed. 

You can also simply get a cheap phone on contract. A £5/month contract will be achievable with little or no credit history as the risk of default is very low and making regular repayments to your phone contract will boost your credit file.

You should avoid applying for more expensive phones with no credit file or score as this could damage your credit score even further even though you don’t have one.

Not all utility providers report your payment history to the credit bureaus so you may want to inquire with the utility provider before opening an account.

Keep your credit utilization below 30%

Your credit utilization is one of the factors that affects your credit score. The golden rule is to use no more than 30% of your available credit. If you are currently using above this then reducing your credit utilization below this limit will help improve your credit score

Pay down your credit card balance & other debts

Credit card balances and credit debts are recorded on your credit file. These balances have a negative impact on your score(especially when your revolving debt is over 30% of your available revolving credit) as well as costing you in interest rate charges and fees. 

Paying down your credit card balances, loan balances or any default you have on utility and credit accounts will help improve your credit score.

Paying your credit card balance in full each month

Making only the minimum payment on your credit card means you have an outstanding balance which is recorded on your credit file.This negatively influences your credit file. Paying your credit balance on time full in each month will help improve your credit score

Make your credit repayments on time

Missing credit repayments negatively impacts your credit score. Keeping up with your monthly credit repayments will see your credit score improve gradually.

Making your credit repayments on time will also ensure you avoid negative credit markers such as:

  • Defaults
  • County court judgments
  • Missed repayments
  • bankruptcy

Get on the electoral roll

The easiest way to improve your credit score is to register to vote as this data is recorded on the public register which the credit bureaus check and include in your credit file. This is the first way to prove your identity and by far the easiest.

In the future when you apply for credit or a credit check is done, this will be the basis of their verification method for you and helps make you seem more creditworthy. You should check with your local council here if you are already on the electoral roll and if not you can register to vote here.

If you are not eligible to vote in the UK you will not be able to get on the electoral roll. In this case you can get a similar benefit by submitting a document to either Experian, Equifax or callcredit proving your identity and address. You can then ask them in writing to confirm that they have verified your identity on your credit file

Get a credit builder card

To improve your credit score you could get a credit builder card. Credit Builder cards are similar to secured credit cards as they are targeted towards people with low or no credit scores.

Credit Builder cards do not require security deposits but as with secured credit cards they will have low credit limits and high APRs. 

A student credit card will likely be available on the same terms as a credit builder card. The best place to get this might be from your bank as they will be more likely to approve you for this type of card due to already having an idea of your income and expenses.

Store credit cards are usually easy to get approved for too.There are also credit builder prepaid cards which charge a monthly fee which is then recorded on your credit file as repaying a debt. This helps you build your credit score.

Get a secured credit card

Secured credit cards can be used to improve your credit score as they allow you to show you can make credit repayments, they add to your available credit which will improve your score and they allow you to show a low credit utilization which will improve your credit score.

Getting approved for most credit cards will be difficult if you have a low credit score but a secured credit card can help you overcome this. 

Secured credit cards will approve you if you pay a deposit as part of your secured credit card application.

This deposit is usually your credit limit or a percentage of your credit limit. Secured credit cards aren’t very common in the Uk. 

Capital one was known to offer one and you should contact them to see if this is still available. 

You should be aware that secured credit cards will have low credit limits and high APRs. This can lead you to fall into serious debt if you fail to keep up your monthly credit repayments.

Get a credit builder loan

Another way to improve your credit score is by using a credit builder loan.

Credit Builder loans, just as they sound, help you build credit. The idea is you take out a loan but rather than receiving the loan funds these are deposited in an account(usually to earn interest) and you make repayments to the loan provider every month. 

As you make these loan repayments on time your credit file records this and your credit score improves. At the end of the loan term you get all your loan repayments and whatever interest you have gained.

Loqbox is a credit builder loan provider in the UK.

Get a cosigner for a credit card or loan or become an authorised user

If you can’t get a credit builder loan, credit builder card or secured credit card then your next bet to help you improve your credit score will be to get yourself a cosigner on a credit card or loan.

You should really only do this if you are likely to repay your credit cards or loans on time and in full every month.

If you fail to make your credit card repayments on time then this may affect your co signer’s credit score too. If you make these repayments on time your credit score will rise and the payments will be registered on your credit file for at least 6 years.

Getting a cosigner on a credit card or loan creates a financial relationship between yourselves. This means any negative behaviour from them might affect your credit score negatively and vice versa. 

A cosigner essentially allows you to qualify for credit and in some cases cheaper credit. A cosigner will also be legally responsible for any debt owed on the account if you default.

Another way to help improve your credit score is by becoming an authorised user on someone else’s credit card.

The difference between authorised users and cosigners isn’t that much. Becoming an authorised user on someone else’s credit card will help you improve your credit score if the main card holder makes all their repayments in full and on time each month as well as keeping their credit balance low.

some credit card companies might not take you into account and may not collect this data and hence report it on your credit report.

You should contact the credit card company asking them to report the fact that you are an authorised user on the credit card to the credit bureaus. 

Becoming an authorised user does not give you any liability, so if the main card holder defaults you won’t be held liable but it does affect your credit score if the account is mismanaged or goes into default.

Keep your credit accounts open as long as possible

Closing credit accounts can negatively impact your credit score as this reduces the number of accounts with a credit history. This is especially worse if the credit account you close is one with a long history. The account will no longer be open and will therefore not count towards the majority of your credit score. 

Unused credit accounts which don’t have long histories can be closed as they do not add to your credit score. Having access to too much unused credit may also be seen as negative.

Avoid payday loans

Most lenders look down on payday loans as they view people who take out these loans to be desperate and hence financially irresponsible.

Paydayloans will therefore have a negative influence on your credit file and you should avoid them.

Avoid making too many credit applications

Making applications for utility or credit can reduce your credit score. This is because everytime a utility or credit provider is about to open a new account they will do a hard credit search. You should only apply for credit or utility which you are pre-approved for. If you make multiple credit applications then multiple hard credit searches will be done on your credit file.

This means your credit score will go lower as the credit bureau will view too many credit applications as you being desperate. If you stop making blind credit applications then your credit score will likely improve. 

You should always use an eligibility checker to see if you will be approved for credit or utility accounts before you apply. These checks are done with soft credit searches which only you can see.

Report your rent to the credit bureau 

Another way to improve your credit score is by reporting your rental payments to the credit bureaus.

If you currently pay rent or paid rent within the last 3 years you will be able to report your rental payments to the credit bureau and this will be an account on your credit file showing your payment history. 

Paying your rent on time will ofcourse improve your credit score whilst missed payments will reduce your credit score. The scheme is known as the rental exchange scheme and is currently only being offered via Experian.

Increase your available credit limit

Increasing your credit limit will reflect on your credit file and improve your credit score as it shows lenders are willing to trust you with more money as well as reducing your current credit utilization (how much you spend in relation to how much credit you have available. The golden rule is a maximum of 30%). 

You can ask your current card provider to increase your credit limit or let you know if you will be eligible for a credit limit. Also ask if they intend to run a hard credit search on you and do not consent to this unless they will pre-approve you for a credit limit increase.

Open a new credit card account

Opening a new credit account will be your next option if your current credit card provider will not increase your credit limit. You essentially accomplish the same things as your available credit limit increases. 

You must repay your balances on your credit card account every month and avoid using over 30% of your available credit. This is a good option if you want to improve your credit score.

Have a good credit mix

Mix things up a little by having a varying degree of accounts on your credit file. Like your partner, credit bureaus like to see you mix things up a little bit. By this, we mean that a proportion of your credit score is ranked by how diverse the different types of credit you have been utilizing is.

Examples include:

Revolving accounts (i.e. credit cards, store cards)

Installment accounts (i.e. home equity line of credit, auto loans)

Open accounts (utility accounts)

Increase your variety and your credit score will increase.

Ensure your registered address is the same on all your credit accounts

Any active accounts on your credit file should display your correct address. You can check the addresses on your accounts by viewing your credit file. Make sure all active accounts list your current address. This may improve your current credit score.

Check your credit score regularly

Checking your credit score regularly is one of the ways to ensure that the information on your credit score is indeed up to date.

It also informs you on what your credit score is and this allows you to have an idea of which credit providers may lend to you.

If you find any errors on your credit score or report you can contact all of the credit bureaus or the specific credit bureau where the error is mentioned and ask them to make the necessary corrections.

The credit bureaus will check and investigate the matter but in the meantime put a notice of correction on the record entry so that any third parties who are checking your credit score will be aware that the entry may be incorrect.

The credit bureau will usually let you know the outcome of their investigations within 28 days.

If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.

Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.

Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.

Remove negative financial links

You should check your credit file for financial links that you don’t recognise. Some financial links can reduce your credit file as this might mean your credit score is going down due to someone else’s bad credit behaviour.

Any financial links which seem out of the blue can be removed from your credit file. Financial links can be generated by just sharing apartments with someone else, getting a loan with someone else, etc. You should ask the credit bureaus to correct this. As you remove these negative financial links your credit score should improve.

FAQs: What do banks look at when applying for a personal loan

Is it hard to get a personal loan from a bank?

No, getting a personal loan from a bank should not be any harder than applying to an online lender. Online lenders have been known to be faster and more innovative though.

What is the best reason to give when applying for a personal loan?

One of the best reasons to give when applying for a personal loan is personal expenses such as the purchase of electrical goods etc.

How do banks verify income for personal loans?

Banks verify income for personal loans by looking at your bank statement. IN some cases no income verification is done and the bank simply relies on your credit score and history.

Can you be denied a personal loan?

Yes, you can be denied a personal loan if you do not meet the lender’s criteria. To avoid being denied for a personal loan you should use a personal loan eligibility checker to see which personal loans you have a high chance of being accepted for or what personal loans you are pre-approved for before applying.

In this brief guide, we answered the question “.What do banks look at when applying for a personal loan”.

If you have any questions or comments please let us know.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.