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What to Consider Before You Borrow

Prepare and plan to get the loan you need

If you’re thinking about borrowing, now’s a good time to assess your financial situation.

See where you stand financially

To find out whether you’re ready to take on new debt, measure your credit status against the criteria that lenders use when they review your application. At Wells Fargo, we call this the 5 Cs of Credit.

Get started by reviewing 3 of the most important factors that you can influence:

  • Your overall credit history
  • Capacity (your ability to repay)
  • Collateral (your personal assets)

Credit history

What it is

If you want insight into your credit history, take a look at your credit report and credit score. It’s the primary indicator of overall credit activity, which includes any credit accounts you have opened (or closed), as well as your payment history over the past 7 – 10 years. Reviewing your credit score is one of the quickest ways to assess your current credit situation.

In addition to your credit history, many lenders also considers your history as a customer. Since lenders look at your overall financial responsibility on top of your credit history, your relationship with your bank can be valuable as you look for new credit.

Why it matters

A good credit score shows lenders that you have responsibly managed your debt and have consistently made timely payments on your accounts.
Compare credit score versus credit report

Wells Fargo standards for credit scores:

  • Excellent: 760+: You should generally be able to qualify for the best rates, depending on your debt and income levels and the amount of equity you have in any collateral.
  • Good: 700-759: You should typically be able to qualify for credit, depending on your debt and income levels and collateral value (but you may not get the best rates).
  • Fair: 621-699: You may have more difficulty obtaining credit, and will likely pay higher rates for it.
  • Poor: 620 and below: You may have difficulty obtaining unsecured credit.
  • No credit score: Typically, you have not built up enough of a credit file at the credit bureau to calculate your score, or your credit file has not had activity for some time.

Check your credit report and credit score

Access your free annual credit report annually from all three national credit bureaus and make sure your credit history is accurate and free from errors. You can also receive a credit score when you request your report, but there may be a fee.
Get your free annual credit report

Good credit saves you money

Good credit can impact interest rates, the better your credit score, the better your interest rate options may be.Your credit score can impact interest rates, your terms, or the amount of your loan. The better your credit score, the more money you may save on interest rates.

For example, with a good credit score and a loan of $15,000 at 10%, you would pay $391 per month.

Capacity, your ability to repay

What it is

Your ability to repay indicates how comfortably and consistently you’ll be able to make payments on your loan. Lenders use different factors to determine your ability to repay, including your monthly income and monthly financial obligations (like loan payments, rent, and other bills), which we call your debt-to-income (DTI) ratio.

Why it matters

Lenders look at your DTI ratio when they’re determining whether or not to lend money or extend credit, as it helps them assess whether you’re able to take on new debt. A low DTI ratio is a good indicator that you have enough income to meet your monthly obligations, and take care of additional or unexpected expenses.

Learn more about DTI

To calculate and understand your DTI, explore what factors contribute to it and see Wells Fargo standards for DTI ratio.
What Is Your DTI Ratio?

Collateral, your personal assets

What it is

Collateral is a personal asset that you already own, such as your car, a savings account or a home.

Why it matters

Collateral is important to lenders because it offsets the risk they take when they offer loans. The good news is that using your assets as collateral broadens your borrowing options to include products that generally have lower interest rates and better terms. Remember: When you use an asset as collateral, you may have to forfeit it if the loan is not paid back.

Use your assets

If you have equity in your home or car, or have savings, you could potentially use it as collateral to secure a loan.

Here are a couple of ways your assets can help you:

  • Having good credit and using assets like savings, a car or a home as security can help you acquire a loan for larger amounts, better terms, or lower rates.
    Types of secured loans
  • If you’re just getting started with credit or rebuilding credit, using your savings as collateral can help you secure new credit more successfully.
    Establishing credit

You have options when it comes to paying for a large expense

Compare borrowing options

Debt-to-income (DTI) ratio

Your debt-to-income ratio is the percentage of your monthly income that goes toward paying down debts and other monthly expenses like rent.