Whether you realize it or not, asking for a loan can be a little like asking someone out on a date.
The moment a person is asked on a date, he or she obviously sizes up their prospective partner. Few people would say, “Yes, let’s go on a date,” if they didn’t think there was something positive about the person doing the asking.
Lenders are the same way. They’re going to size you up, and if they don’t like what they see, you’re going to be told in a cold Dear John letter that it’s you and not them (lenders don’t exactly let you down easy).
And while the credit score and credit history are the most important reasons why a lender, or its computer algorithm, will accept or reject you, there’s another, often forgotten, factor that can come into play: consumer behavior. It might be helpful the next time you’re in the market for a loan to remember that. Because, yes, your lender is judging you.
[See: 10 Money Questions to Ask Your Parents.]
Lenders find it a turnoff when a borrower is in stress. Joshua Weiss is the CEO of TeliApp, a software company that is currently integrating and testing their artificial intelligence engine, Draconis, with two banks. Draconis, Weiss says, “detects and analyzes trends and predicts human behavior.”
You may want to borrow money to reduce your stress, but your stress is what stresses out lenders, according to Weiss.
Banks want to obviously predict which consumers are safer lending risks, Weiss says, adding: “These predictions are done based on their purchasing habits. Not just what they bought, but rather when they purchase the products, where they were when the purchases were made, what succession were the purchases made, there are dozens of valuable data points that, when analyzed, can tell us a lot about a person and their habits; not only purchasing, but even general likes and dislikes.”
So if you are under stress, and especially if you know you’re going to be applying for a loan in the near future, try to stay under the radar. In other words, go exercise. See a movie. Do something to ease your stress that a lender can’t criticize you for. If you’re going to take out a home equity line of credit or ask to have the credit line on your credit card raised in the near future, so you have extra financial padding, you probably don’t want to use your credit card at a handful of casinos and bars. Not that there’s anything wrong with either activity, but if you never go to a casinos and bars, and you suddenly do before taking out an expensive loan, a lender who learns of those activities could connect the dots and make some unhelpful conclusions.
You can scare lenders off by looking like you’re stretching yourself too thin. Generally, a lender won’t know if you’re on the verge of a divorce or in the middle of a court case in which you could lose your shirt, but if they find out, that can be a good reason to reject a loan.
Aaron Norris, the vice president of The Norris Group in Riverside, California, which offers hard money loans for real estate investors, freely admits that is a concern in his business.
“When deciding to extend leverage for a real estate investor, we look at the asset to ensure it’s a good deal but we also want to make sure we’re working with an individual with the financial bandwidth and know-how to get through the deal successfully,” he says.
He says that litigation, family feuds or having a bankruptcy on your record are all top contenders for being rejected for a loan.
“When any prospect calls and starts the conversation with, ‘I have a situation …”, there’s a 90 percent chance, ‘No’ will be the answer to the loan,” he says.
The moral of the story, unfortunately is if you’re looking for a loan, and you have extenuating circumstances, it’s best to keep your mouth shut when talking to a lender. Of course, an even better moral: If you have extenuating circumstances that could prevent you from paying back a loan, don’t apply for it in the first place.
[See: 12 Ways to Be a More Mindful Spender.]
When a consumer’s spending behavior changes dramatically, lenders find that unattractive. Instead of a dating analogy, let’s go with a wildlife one: If you’re going to ask for a loan in the near future, treat this time period like you might if you came across a bear sleeping in the woods. Keep moving, and don’t make any sudden moves.
So, for instance, don’t max out your credit cards any time soon, even if you plan on paying them back, Weiss says.
“A person who normally maintains a 30 percent balance on all cards for many years and all of a sudden begins to build a balance on that card while simultaneously depleting cash reserves from checking or savings accounts can absolutely produce a red flag,” he says.
Weiss says that one-time purchases like the purchase of a home, car or boat can sometimes convince a lender that something amiss is going on in your life. If you’re buying a boat for the right reasons — you have a pile of money, and life is good — you’re probably fine, according to Weiss. But he adds that lenders also recognize that people sometimes go through rough patches in life, like an expensive divorce or a loss of work that can suddenly make a consumer a high risk.
And your lender is looking out for that.
Lenders also get suspicious about a lot of credit card accounts being opened at once. You may have a perfectly good reason to — maybe you’re starting a business and want some credit cards but don’t want to max them all out, and so you’re opening several. Maybe you’re interested in earning rewards. But nevertheless, that can look suspicious to a lender.
[See: 9 Financial Tools You Should Be Using.]
“About 10 percent of your credit score is impacted by the number of new credit you’ve applied for and when you last opened your most recent account. Try not to apply for too much credit because ‘hard inquiries’ can remain on your credit report for up to two years,” says Tim Hong, a San Francisco-based chief marketing officer of MoneyLion, a financial services company.
That said, Hong adds that if you’re comparison shopping and applying for credit from multiple banks for a car loan or mortgage, as long as it’s done within a 30-day window, credit bureaus and lenders generally recognize what’s happening.
All of this means one thing when you’re preparing to apply for a loan: Treat that lender like a prospective date and try to seem like a good catch, financially speaking. You’ll want to comb through your credit history and remove any unsightly errors that cast you in a bad light, for instance. If there’s time to pay off old debts and to keep paying bills on time, you may spruce up your credit score. Still, no need to take it too far. While it may not hurt to pop in a breath mint and dress nicely if you’re applying for a loan in person, you definitely don’t want to max out your credit cards on a new wardrobe.
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Is Your Lender Judging You? originally appeared on usnews.com