Ben Labenski • Apr 03, 2019
Applying for a loan isn’t always easy, let alone qualifying and being approved to borrow money. At Borrowell, we’re dedicated to helping Canadians make great decisions about credit and ultimately to help in making personal finances less stressful.
The best thing about Borrowell? We offer financial product recommendations based on your credit score that we think will help improve your score or financial well-being in general.
We wanted to offer some advice as to how you can improve your chances of getting that often-elusive stamp of approval, be it from us or any lending institution in general! But before that, we’d like to take a moment to go over the requirements to qualify for a Borrowell loan.
The key requirements to qualify for a Borrowell personal loan are:
If you have numerous monthly bills that you’re juggling, a personal loan can help you minimize your monthly financial to-do list by consolidating those payments into one convenient bill. Taking out a personal loan can help you pay off your outstanding balances on credit cards, lines of credit, or other loan obligations. By doing so, you’ll only have to worry about one monthly payment.
Check your credit score for free in 3 minutes to see what loans you could qualify for.
Similarly, if you have racked up a significant amount of credit card debt, it may be worth taking a couple of minutes to apply for a loan to see what rate you could qualify for. If the rate that we offer is lower than the rates on any of your current debts, you could stand to save a good chunk of change by taking out a loan. Who doesn’t like saving money?
A Borrowell loan will help you get out of debt on a schedule, as we offer 3-year and 5-year loan terms. These are considered the ‘maximum’ terms that we offer, as we don’t have early repayment fees. Making additional payments will result in your loan being paid off sooner, so you’ll save even more money on interest accrual.
Loans are also a great option if you’re planning on making a large purchase (like a car). Or, if you experienced an unforeseen expense and would prefer to pay for it with a low-interest loan over a high-interest credit card.
While this may seem counterintuitive, reducing the amount of debt that you carry before you apply makes you appear as a more attractive and responsible borrower in the eyes of a lender. This can result in you being offered a slightly better rate.
Of course, it wouldn’t be the best idea to pay off so much debt that your financial well-being hinges on your loan application’s approval. That being said, this advice could be applied in a method as simple as applying for a loan after you pay your monthly bills, as opposed to immediately beforehand.
Debt-Service Ratio (DSR) is a term that refers to one’s cash flow availability to pay off current debt obligations. Applied in an overly-simplified form, one’s DSR is their total monthly debt obligations divided by their total monthly income and is often represented as a percentage.
For example: Applicant: Total Monthly Debt Obligations = $1,500 ($800 rent, $400 in credit card payments, $300 in instalment loan payments). Total Monthly Income = $4,000. DSR = $1,500 / $4,000 = 0.375 or 37.5%
By nature, an applicant with a lower DSR has more available money to pay off financial obligations and would be considered a strong applicant in the eyes of a lender. When lenders factor credit card or line of credit debt into one’s DSR, they’ll typically take a percentage of the total outstanding debt on the card or credit line and add it to an applicant’s total monthly debt obligation. Now you may see why paying off credit card debt prior to applying for a loan (if you can), or simply applying for a loan after you pay your monthly bills, could increase your chances of qualifying, by way of a lower, more attractive DSR.
Now that you’re well-versed in the Debt Service Ratio, you may have noticed that the denominator in this equation is your monthly income. You may be thinking that instead of paying down debt to decrease the equation’s numerator, increasing the denominator by way of overstating your income would be a simpler, hassle-free way of improving your DSR and overall chances of qualifying.
Not so fast! While lenders will ask you to declare what your annual income is, they’ll always ask you for tangible documentation that proves the income amount that you have declared.
If you’re applying for a loan, we’ll ask you to provide either two recent pay stubs from your current employer, or your two most recent Notices of Assessment. Depending on your type of employment, or when you began working for your current employer, one type of document may be more applicable – or even more favourable, towards your approval.
If you are compensated via salary, and/or started working with your current employer less than two years ago, pay stubs would accurately depict your current income situation, where NOAs may not. If you receive commission, Notices of Assessment would provide proof of your commission’s consistency on an annual basis. The same rule of thumb would apply if you are compensated on an hourly basis and work a lot of overtime. If you’re self-employed, there’s a good chance that you don’t receive pay stubs, thus Notices of Assessment would be the best documents for you to submit.
When discussing DSR, you likely realized that your rent/mortgage payment is factored into the calculation, while other living expenses are typically not. When you’re declaring how much you pay, particularly with a mortgage, it is important to know how much that amount – on a monthly basis, actually is. The most common error seen is when individuals make bi-weekly mortgage payments, and they multiply their payment by two to calculate their monthly amount. This is actually incorrect, as the only month of the year that has exactly four weeks in February.
Sometimes, as one who is paid bi-weekly would know, bi-weekly payments can result in an individual making three payments in one month, depending on how the calendar falls. For this reason, it’s important to calculate your monthly mortgage payment properly. To do this, one would multiply their bi-weekly payment amount by 26 (a bi-weekly mortgage has 26 annual payments), and then divide by 12. By doing this, the few months of the year where you make 3 mortgage payments will be spread evenly throughout the calendar year. For example:
Mortgage Payments: $400 bi-weekly. Incorrect: $400 X 2 = $800 monthly
Correct: $400 X 26 payments per year, / 12 months per year = $866.67 monthly
When budgeting it’s important to factor this in, as it could be the difference between paying off your debt obligations adequately or falling under financial stress in those unforeseen months where you’ll make more than two mortgage payments.
If you’re trying to consolidate your debt, but you cannot find a loan with a better rate than what you already have with your current loan(s), credit card(s), or line(s) of credit, then a new loan won’t really help you consolidate your debt. If such is the case, at least you can take solace in the fact that your current rates are more competitive than what you’re being offered.
Further, if you’re juggling your numerous monthly payments, and are looking for a debt consolidation loan to slim your bill schedule down to one easy payment, it’s important to consider how large of a loan you can get. If your main issue is keeping up with numerous payments, it would be prudent for your loan disbursement to be large enough to consolidate all of your current debts. With this scenario, one would be able to bring their number of bills down – ideally to just one. If this is not the case, one would simply be juggling new debts, which wouldn’t necessarily remedy their financial situation.
Congratulations – you’ve done everything in your power to qualify for a personal loan. Even if you still don’t qualify, you should be proud that you’ve taken numerous positive steps to improve your financial well-being. If you do qualify, all that is left for you is to sign your Loan Agreement, and your disbursement will be deposited into your bank account tomorrow. While this is great news, it may be in your best interests to review your Loan Agreement in its entirety before signing it.
No worries! At Borrowell, we break up your origination fee over the term of your loan. A small portion of this fee is paid on every monthly payment, so you don’t have to worry about any up-front or end-of-term costs. Put simply, you’ll only have your one monthly payment. In a Borrowell Loan Agreement, you’ll also find a schedule outlining all of your monthly payments and the effect that they will have on your balance. You’ll also find that you can make additional payments whenever you like, without any fees or penalties associated with doing such!
Now that you’re armed with some tips and tools to improve your chances at being approved for a loan, take a few minutes to check your free credit score with Borrowell and see what you could qualify for.
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Borrowell® is a registered trademark of Borrowell Inc. All Rights Reserved. The Equifax credit score is based on Equifax’s proprietary model and may not be the same score used by third parties to determine your credit profile. The score provided to you for educational use is the Equifax Risk Score.
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