Unsecured Loans- Credit Score And DTI Matters

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Author: Eric Hector

Article source: http://www.articledeshboard.com/. Used with author's permission.

As the name implies, unsecured loans don't require the borrower to offer any of his fixed assets like house as collateral in lieu of the loan amount borrowed. Rather, the loan is given afetr viewing the borrower's credit history and his ability to repay. This way, the lender judges the credit worthiness of the borrower. These loans are also called consumer loans. Unsecured loans are multipurpose loans and therefore, can be used for a plenty of purposes. Some of these are mentioned below

- Debt consolidation
- Going for holidays
- Meeting educational and medical expenses
- Wedding expenditures
- Education purposes

The following are the parameters on the basis of which a lender grants unsecured loans to the customers.

The credit history of the borrower - This is the most crucial criterion for judging a borrower's credit profile. If the borrower suffers from a number of defaults, arrears and missed payments in his credit history, his chances of securing an unsecured loan are low. He may, though, get a bad credit unsecured loan but that attracts a high interest rate. If the credit score of the borrower is above 700 on the scale of 800, he may get an unsecured comfortably enough because of his excellent credit record.

The DTI ratio of the borrower - DTI that stands for Debt to consolidation ratio reflects the affordability and repaying capacity of the borrower. It tells the borrower's disposable income. DTI = Debts/ Income of the borrower. If the DTI is greater than 3.6, the borrower has good chances of getting an unsecured loan without much hassles.

The above cited reasons are the two most important factors that contribute to the lender's decision in respect to the loan amount, loan tenure and APR to be charged. If the credit history of the borrower is bad but the DTI ratio is good, the borrower may get a loan. the golden rule is better the credit score of the borrower, lower his annual percentage rate (APR).

The author is a business analyst currently assisting Longdog Finance, for Unsecured Loan and he writes imperative articles on different products of the organization.