Borrower Risk Profiles | Consumer Financial Protection Bureau (2024)

FAQs

How do lenders know who the risky borrowers are? ›

And in many cases, lenders use information like the applicant's credit history and DTI ratio to assess credit risk. Generally speaking, borrowers with higher credit scores are considered less risky to lenders.

Subprime (credit scores of 580-619) Near-prime (credit scores of 620-659) Prime (credit scores of 660-719)

What Is a High-Risk Borrower? Lenders label a loan applicant as a high-risk borrower when the applicant's low credit score and/or poor credit history means he or she has a high possibility of defaulting. To a lender, a high-risk borrower likely has few, if any, other options for a loan.

On the FICO credit score range, a prime credit score is between 660 and 719. Borrowers with prime credit scores tend to pose relatively little risk to lenders and creditors. With a prime credit score, you may qualify for more favorable loan or credit card terms, interest rates and reward programs.

A lender may occasionally ask for three months of bank statements, or a full quarter, to verify income and check on the status of your incoming money. However, two months' worth is often enough for them to dig into the financials and figure out whether you're capable of paying off the mortgage.

FICO® scores are the credit scores most lenders use to determine your credit risk and the interest rate you will be charged.

Payment history is weighed the most heavily in determining your credit score, along with your total outstanding debt. Generally, the required credit score for a personal loan is at least 580. To qualify for a lender's lowest interest rate, borrowers typically need a score of at least 800 and a high income.

You'll usually need a credit score of at least 640 for the zero-down USDA loan program. VA loans with no money down usually require a minimum credit score of 580 to 620. Low-down-payment mortgages, including conforming loans and FHA loans, also require FICO scores of 580 to 620.

Santander is one of the largest sub-prime auto lenders in the USA. I took a look at one of their recent SEC filings (Available Here) and did some data analysis on the XML to come up with averages that this sub may find fascinating. * this is the average next payment due, not the average scheduled amount due.

Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.

What are the riskiest loans? ›

High-risk loans can come in several forms: Secured loans: These loans require you to put up an asset, such as your car or house, as collateral to secure the loan. If you stop making payments or default, you can lose that collateral. The value of the collateral can vary widely, depending on the loan amount.

Because unsecured debt is more risky since it is not backed by secured assets, it will often charge borrowers higher rates.

Late and missed payments can wreck your score. Keep credit use to a minimum. Only use credit cards for things like gas and groceries, so that you will not be seen as a high-risk borrower. Using less than 30% of the credit you are given gives you a good standing as a borrower.

While most lenders use the FICO Score 8, mortgage lenders use the following scores: Experian: FICO Score 2, or Fair Isaac Risk Model v2. Equifax: FICO Score 5, or Equifax Beacon 5. TransUnion: FICO Score 4, or TransUnion FICO Risk Score 04.

Character

This information appears on the borrower's credit reports, which are generated by the three major credit bureaus: Equifax, Experian, and TransUnion. Credit reports contain detailed information about how much an applicant has borrowed in the past and whether they have repaid loans on time.

About half the time, a bank monitors a small private company by requesting financial statements, and in other cases it asks for tax returns or proof of creditworthiness. But often the bank doesn't require any financial reporting—faith and collateral are sufficient.

Looking at employment history to ensure borrowers have a stable enough job to make regular payments. Offering loan amounts based on what customers can repay. Predicting which applicants are most likely to pay their debts on time. Tracking borrower behavior over time to identify changes to a borrower's risk profile.

Predatory lenders use unfair and deceptive practices that mislead people into taking out loans that aren't in their best interest. Frequently, these loans aren't affordable, have confusing or misleading terms, and come with high fees.