As debtors and borrowers got into the habit of being under debt, their dependency upon the debt relief options would never seem to end and this make the lenders often use risk-based lending when making lending decisions. Risk-based lending is a policy that helps institutions determine the borrower’s interest rate. If a borrower is seen as a higher risk, then the bank will charge a higher interest rate on the loan. Of course, if the borrower is a low-risk borrower, then she can enjoy one of the best interest rates available. Often, lenders assign a letter grade to each borrower which indicates the standard or the level of the borrower. As their credit improves, their grade will also improve. Risk-based lending gives institutions the ability to serve a wider population. In the past, lenders might have avoided customers with any blemishes in their credit history, and they might only have had one interest rate for each type of loan. If an applicant with bad credit tried to get a loan, the lender would probably respond, “Sorry, we can’t offer you a loan.” The result was that these customers had to resort to finding loans in other places; typically they fell victim to predatory-lending practices. But nowadays, even these people can get a loan at a more reputable institution. Of course, the institution is entitled to be compensated for taking more risk with a borrower who has bad credit as they earn a higher interest rate on the money they’re lending. These programs are helpful for people who need to build credit, and for people who need to rebuild credit; they either have no credit history, or they have a bad credit history. For them, it is really difficult to get a loan. Risk-based lending may be the only option for them to find financing. Ultimately, getting a loan is about more than just your credit score. Lenders who use risk-based lending place a lot of weight on your score. However, they look at other factors, too. For example, they want to make sure that your income is sufficient to cover any debt payments that you’re about to take on. Likewise, they will consider whether or not the debt is secured (such as an auto that can be repossessed, or a home that can be foreclosed on). Finally, they want to make sure that you can put some money down. If you don’t make any down payment, or if the loan-to-value ratio is too high, they will be more reluctant to make a loan.
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