If you've filled out a loan or credit application, you've probably seen a reference to outstanding loans on the application. Outstanding loans themselves are not significant if you can afford the monthly loan payment, but they can have a significant and potentially negative effect on your credit.
Definition
An outstanding loan is the remaining principal amount of the loan. The principal amount is the remaining balance of the loan itself, which excludes interest payments and fees. For example, if you took out a loan for $25,000 and you paid $10,000 toward that loan balance, the principal amount and outstanding amount would be $15,000. An outstanding loan is not the same as a delinquent loan. A delinquent loan is a loan that is past due.
Outstanding Loans and Credit
Outstanding loans have a significant effect on the Fair Issac Corporation (FICO) credit score. Your FICO credit score usually is considered by financial institutions, especially mortgage lenders, when they determine whether to issue a loan and what interest rate to charge. Your FICO credit score is determined by five pieces of data. Amounts owed, such as outstanding loans and credit card debt, amounts to 30 percent of your FICO credit score. Amounts owed is the second largest determining factor for your FICO score, just behind payment history. Generally, the more outstanding loans you have, the less willing lenders are to approve you for loans. Having a lot of outstanding loans tells lenders you have a lot of monthly payments to make, and adding one more may be more than you can handle.
Debt-to-Income
Outstanding loans, along with credit card debt, account for your debt when calculating your debt-to-income ratio. Your debt-to-income ratio is determined by adding up your total debt per month (loans and credit card debt) and dividing it by your total gross income. If your outstanding loans and credit card debts are small relative to your income, your debt-to-income ratio is low. Your debt-to-income ratio affects both your personal finances and your ability to obtain a loan. A debt-to-income ratio that's too high may cause a lender to deny your application for credit. According to the Lendingtree website, mortgage lenders usually will not issue a mortgage loan to applicants who have a debt-to-income ratio higher than 40 percent.
Cars and Outstanding Loans
When you finance a car, the title belongs to the lien holder or financial institution that approved you for the loan. You cannot sell a car to a private buyer if the car has an outstanding loan, because the car technically belongs to the financial institution. To sell a car with an outstanding loan, you may need to schedule an appointment with the private buyer to meet at the financial institution. The buyer can either pay the loan off and have the title released to him, or you can transfer the loan to the buyer.
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