Factors That Affect Your Loan Eligibility

Loan eligibility is a broad term that encompasses several factors, including credit scores, income, employment status and housing situation. Financial institutions favor borrowers with strong credit scores that demonstrate financial stability and responsibility.


Some lenders even offer a prequalification process that lets you see potential rates and terms without affecting your score.

Credit Score

For decades, credit scores have been a leading factor that lenders use to decide whether or not you can get loan approval and for what amount. They are used by banks, credit card companies, auto dealers, and many other financial institutions to quickly and accurately summarize your past behavior in order to make a decision about giving you a loan.

Credit scores are three-digit numbers that are calculated based on your credit history, payment behavior, current debt, and credit utilization. They typically range from 300 to 850, with higher scores indicating better creditworthiness. Having a good credit score can help you qualify for hassle-free loan approvals and better interest rates. Moreover, a high credit score can also help you save thousands of dollars in interest payments over the life of your loan.

How to improve your credit score? To raise your credit score, pay your EMIs and other bills on time and keep your credit utilization ratio (the amount of debt you have compared to your credit limit) low. You can also minimize the number of “hard inquiries” you make by only applying for credit when you really need it. Too many requests for new credit can send a signal that you’re trying to take on more debt than you can manage, which can lower your credit score.

Debt-to-Income Ratio (DTI)

When applying for new credit, your debt-to-income ratio (DTI) is an important number that lenders take into consideration when assessing your application. Your DTI is calculated by dividing your total monthly debt payments (excluding alimony or child support) by your gross monthly income, which is the amount of money you earn each month before taxes and deductions.

DTI is expressed as a percentage, with lower numbers indicating less debt and more financial stability. Lenders typically prefer borrowers with DTIs below 35%, but there is no one-size-fits-all limit for what constitutes a healthy DTI, as this depends on personal factors like lifestyle goals and tolerance for risk.

There are several ways to improve your DTI, such as paying off existing debt through a debt management plan or using the snowball method, negotiating with creditors, and increasing your income. You should also regularly review your credit report and dispute any errors that could negatively impact your DTI.

If you’re struggling to lower your DTI, consider seeking professional help from a nonprofit credit counseling agency to help you make a plan and stay on track. Taking on additional employment or side hustles can also increase your income and improve your DTI. While you might not be able to lower your DTI immediately, working toward your financial goal will put you in a better position for future opportunities and unforeseen expenses.

Cash Flow

If you’re a business owner, you know that cash flow is critical to your success. It’s the net amount of cash moving into and out of your business at a given point in time. It can tell you whether your business has the capacity to take on debt, if it’s growing or if it’s struggling.

Your business’s operating cash flow is what lenders typically consider when evaluating your loan eligibility. This reflects the money that comes into your business from customers, inventory purchases and other operational activities. Your business’s cash flow statement can break this down further, showing you how much is coming in versus going out.

Financing cash flow is another important consideration for lenders. It shows the net cash related to financing activities that power many businesses, like selling equity shares to investors or paying dividends to shareholders.

There are several different types of cash flow financing, including working capital loans, invoice factoring and business lines of credit. Most of these are unsecured, meaning you don’t have to put up any collateral. However, they are often more difficult to qualify for than other financing options, especially if you’re self-employed or have a short credit history. To qualify for a cash flow loan, you’ll usually need a solid business plan and positive projected cash flows. You may also be required to submit a personal credit check, though some companies offer soft inquiries that don’t impact your credit scores.


Your employment plays a major role in your loan eligibility. Lenders look for stable and secure income from a long-standing and reputed employer to judge your capacity to repay. They prefer applicants who work for a large corporation over those working for small or medium enterprises (SMEs) and start-ups. To verify your employment status, a lender will ask for pay slips or bank statements that show salary being credited to your account each month. You will also need to provide your recent federal tax returns or transcripts. In addition, you may have to sign a verification of employment (VOE) form authorizing the lender to contact your employer or a third-party vendor to obtain employment information. Applicants who are self-employed will need to provide two-year average of their business income.