It can be confusing trying to figure out all the factors a lender uses to qualify you for a loan.  While there may be many things a lender looks at when deciding to give you a loan, there are really only three things that are going to matter.

- collateral
- credit
- income

A lender is always thinking about getting paid.

They want to know you will pay them back.  If you have good collateral to put down on the loan then the lender likes this because they know if you default they get that collateral.  They like to see good credit because it shows you pay back your debts.  They also like to see steady and stable income so they know you have the money to pay them back.

The bottom line in qualifying for a loan is that if a lender can not be certain you will pay them back then you will not qualify.  It really is that simple.

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It is often confusing why lenders would charge higher interest rates to someone with bad credit.  A person with bad credit does not need the higher payments on a loan that come with higher interest. 

It seems more rational to charge a person with bad credit lower interest so the payments can be more affordable and they are not stuck in the loan for so long.  However, there is very good logic behind the lender charging higher interest rates to bad credit borrowers.

When a loan payment is made only part of that payment is paying the actual loan balance.  The majority of the payment pays the interest and that is money directly in the lender’s pocket.

The lender isn’t stupid.  They know that a person with bad credit is more likely to default on the loan, so they charge higher interest so they can get more money in their pocket right now just in case the borrower defaults.

Now that is smart lending.

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