It's challenging to build an emergency fund while paying off debt, but it can be done! With the right mindset, a plan, and motivation, you can take control of your finances and reduce your stress.
You don't have to have financial security or get out of debt - you can have both! Take small actions, stay focused, and you will find that every dollar you save and put towards debt is one step closer to peace of mind.
Banks and other financial institutions aren’t handing out dollars but are investing dollars. When a borrower requests a loan, a bank assesses how likely the borrower will be able to repay the loan on time. The assessment assesses some level of risk. Banks are much less likely to extend loans to depositors when they believe a greater risk exists. The more risk a bank thinks there is, the more likely the borrower will be denied a loan or the lender will offer less favorable loan terms.
Banks evaluate a depositor's potential future behavior as a borrower rather than a depositor by looking at the borrower's banking history, deposit terms, and debt obligations. This not only helps manage risk for the bank but also lets the negotiable decline justify some favorable or lower interest rates for a lower-risk client.
Your credit score is usually the first and most powerful element banks consider. It’s a three-digit number representing your creditworthiness based on your past borrowing habits.
A good credit score signifies that you have managed your credit well, made all payments on time, and have a good credit balance. It gives the bank confidence that they are making a good lending decision.
Banks want to know how much money you make and how consistent that income is. After all, you need a reliable cash flow to repay the loan.
The more stable and verifiable your income, the more likely the bank will trust you to repay your loan.
The debt-to-income ratio compares your monthly debt payments to your monthly gross income. It helps banks understand if you’re already overleveraged.
DTI = (Total monthly debt payments ÷ Gross monthly income) × 100
Even with a high income, excessive existing debt can make you a risky borrower. A lower DTI shows better financial control and boosts your loan eligibility.
Your banking history tells a story. Banks often review:
A long-standing, well-maintained relationship with your bank can work in your favor. It builds credibility if you’ve been banking with them for years and your accounts are in good standing.
A consistent, responsible banking history reassures lenders that you’re financially disciplined—even before checking your credit score or income.
If you’re applying for a secured loan, like a car or home equity loan, the bank will evaluate the value of the collateral you're offering. Collateral reduces the lender’s risk, giving them a legal claim to your asset if you default.
Common types of collateral:
By default, the bank can recover some or all of the money by liquidating the asset. This can increase the likelihood of approval or result in a lower interest rate.
Not all loans are created equal. Different loans have different risk levels and require other documentation. For example:
The loan amount and purpose influence how a bank evaluates your eligibility. Asking for a loan amount that seems disproportionate to your income or credit profile might raise red flags.
Every bank has its lending criteria, often influenced by
These internal systems determine your risk profile, essentially how likely you are to default.
Factors affecting your risk profile:
Even if you meet basic loan eligibility requirements, your risk profile might result in a higher interest rate, shorter term, or reduced loan amount.
The loan term (length of time to repay) and the interest rate you’re offered can significantly impact whether you can afford the loan.
Why it matters:
If the monthly payments seem too high relative to your income or current debts, banks may adjust the terms or deny the loan altogether.
Have you applied for multiple loans or credit cards recently? Frequent inquiries can suggest financial distress or overdependence on credit.
Too many loan applications within a short period can reduce your score and raise red flags about your financial health.
If your credit profile isn't strong enough, having a co-signer or co-applicant with better financials can improve your chances.
Lenders look at both profiles combined. This strategy benefits students, first-time borrowers, or anyone rebuilding credit.
Banks can help you proactively improve your situation and begin working on a plan by understanding the factors influencing your loan eligibility. Your financial circumstances cannot be distilled to one number; the combination of factors, such as credit score, income, banking relationship, and risk profile, determines whether a bank would lend to you.
If your loan application is declined, don't give up. Please ask for the feedback, work on your weak areas to build a better picture, and reapply when your situation improves.
Loan-ready is not only about your loan getting approved - it is very much about whether your loan terms will work for you financially in a responsible way.
This content was created by AI