Cautious lenders check the credit of a loan applicant before granting loans. The lender determines the borrowers history and whether the borrower has good or bad credit. Credit is essentially the right granted by a creditor to a borrower to pay in the future in order to buy or borrow in the present. Through the credit-scoring method, which is based on statistical analysis of an applicants characteristics, lenders determine the applicant's qualification for credit.

The borrowers capacity, character, and capital are checked by the lender. Large lending companies frequently rely on a credit rating score to help make loan decisions. This information is collected from the credit application and credit report. Then the points are awarded for each factor that determines likelihood of the repayment. The total number of awarded points results in the credit score, and it helps tell lenders the likelihood of a borrower paying back the loan and making the payments on time. Certain factors, like timely payment of credit card bills, are given more weight than others.

Most people think that credit score of 500 is the worst and that 850 is the best. In reality, anything over 680 is good, and there is no trouble getting a loan. A score over 700 is considered excellent. Since the lenders want to be compensated for granting high-risk loans on bad credit, the lower the score, the harder it will be for applicants to find loans at fairly low interest rates. But there are still many lenders who grant loans at the lower rates, even in the case of bad credit, through secured loan options.