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In order to assess the risk of a borrower, lenders assess a number of independent variables present. The current credit status of the borrower, as well as, his borrowing history is extremely important factors which are scrutinized by the lender. The mix of these factors would thus determine the credit risk posed by the borrower.

The factors which are analyzed by the lender include:

• Borrowing History: The borrowing history of a borrower is quantified in terms of the number of hard inquiries made. Whenever a person applies for a loan, the lender will check up his previous record by requesting that individual’s credit report from the credit department. This is termed as hard inquiry. When the lenders notice that there are a number of queries against the potential borrower, who has applied for loan, they might get the idea that the individual is in a bad financial condition.

• Missed Payments and Penalties: One of the best indicators in order to predict the future behavior is to analyze the past behavior. Lenders would avoid granting loan and credit to an individual who has a history of making delayed payments.

• Debt-to-income Ratio: A person who has a high proportion of unsecured debt as compared to his earnings/income will result in lenders considering you as a high risk.

• Income Volatility: Borrowers with a high volatility in earnings are a particular threat for the lenders as they might be able to pay their bills when their income is high, but on the flip side, they cease to remain solvent when their earnings reduce. The risk would be catapulted if volatility of earnings is coupled with a high debt-to-income ratio.

• Credit card history: If the credit limit is maxed-out since a long time, then it presents an obvious sign that the individual is financially strapped and is unable to live within his means. It is an important indicator which shows that the person is unable to mange his finances.

Besides these factors there are many other considerations which play a role in how financial institutions assess the credit worthiness of a potential borrower. Some lenders however prove to be more lenient and flexible, but most of them decide on the same criteria.

Those who are in need of finance but have a poor borrowing history or do not wish to spoil their borrowing history or wish to avoid the Debt-trap should consider secure title loans instead of unsecured loans. An auto title loan is an example of a secured loan because the lender can repossess and sell the car in case of non-payment. Title loans can help to establish a good borrowing history and improve the credit rating if payments are made on time.