How Exactly Do Lenders Calculate Loans?

When looking for a loan, it is easy to believe the way in which a lender decides and calculates loans is too complicated to understand. While it takes a lot of data and information, calculating loans is simpler than most people imagine. When they are broken down, loans are straightforward enough for anyone to have a good grasp of how theirs will be calculated. This is important to know so that you can understand what to do to ensure you get the best loan possible.

Credit History and Category

First, lenders will look at your credit history. While nearly everyone has heard of credit history, many don’t understand what it actually is. Your credit history is basically the records of your debt, loans, and bill paying that can be accessed by potential lenders in order to assess your risk and to calculate how much you should be allowed to borrow. Most lenders now use general categories for people depending on what their credit is like for easier understanding. These categories are based on past credit and current assets.

Qualitative and Environmental Factors

In addition to looking at someone’s credit and using algorithms to calculate loans, banks use an individual review based on the current situation. This means that the lender will look beyond the concrete numbers and will consider the circumstances of the individual at the present moment. Even after CECL, individual review still applies when lenders go to calculate loans. This is important because it looks past previous issues with credit if the person has changed things drastically in more recent years. It also considers likely changes in the near future, particularly with career and salary.

Trends and Statistics

The other main factor that lenders will consider when calculating loans doesn’t have anything to do with the individual. Banks and other lending establishments will look to financial trends and forecasts to see how the current financial climate could impact a loan. If statistics show a rise in loan delinquency or there if there is a predicted downturn in the near future of home prices, these are factors that will be considered.

Loans can seem a complicated business, but there is a simple process behind them all. Before you take out a loan, you must understand what it means and know how it was calculated before agreeing to anything. Educate yourself on loan calculations and other business-related calculations here with CalcuNation!

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