A low credit score worries lenders when you go for a loan as they fear that you will miss payments or skip repayments altogether.
It is for this reason that the interest rate charged for bad credit loans is higher than the interest rate charged for those with good or excellent credit.
There are two primary things a personal lender considers when you apply for your loan, your credit score and your debt-to-income ratio (DTI).
A credit score is a three-digit number between 300 and 850 that shows how well you have dealt with credit in the past.
Setting a minimum credit score helps a bank, credit union, or online lender establish the maximum level of risk they are willing to take.
Your DTI shows how much you owe against your monthly income. It shows your ability to pay the loan.
For example, if you earn $10,000 a month and your rent, car payment, student loan, and credit card payment amounts are $4,000 combined, your DTI would be 40%.
When the lower your DTI, the more confident the lender is that you will earn enough money to make all your payments on time.