The loan screening process
So, you want to increase your chances of getting approved for a loan? Well, understanding how lenders screen potential borrowers is a great start! For example, you may need to earn another month’s salary before you can get a loan. Knowing your credit rating also allows you to sort out any credit issues.
In a nutshell, creditworthiness is the most important factor in loan applications, and it plays a big role in the outcome.
What Lenders Consider: The 5 C’s
Banks and lenders use the 5 C’s of credit to work out your ability to borrow. These allow lenders to understand your financial situation and the level of risk in lending to you.
-
Character
The applicant’s trustworthiness, personality, and credibility are weighed up to see whether the applicant is likely to make payments.
The lender considers credit history, payment history, employment history, references, credentials, and past interactions with other lenders.
-
Capacity
Capacity is about a borrower’s ability to repay a loan based on their cash flow and existing debts. The lender will check out your income, debt-to-income ratio, and income stability.
For a business loan, the lender will also assess the business’s financial status. By examining the applicant's financial capacity, the lender determines whether the borrower can cover new loan repayments on top of their existing debt obligations.
-
Capital
Capital is about the borrower’s assets, liabilities, and savings. Lenders will take into account the total value of the applicant’s assets, how much savings they have, and their existing debts, including credit card debt.
Lenders like to see that you’re confident enough to invest your own funds into the project. With business loans, lenders look at how much the borrower has invested in the business, taking inventory and equipment into account.
For mortgages, car loans, and other major purchases, lenders look at the deposit size the borrower can put down. If the borrower is ready to invest more than the minimum down payment, this will be looked on favourably.
-
Collateral
Collateral, also known as surety, is what the borrower can use as security against the loan. It includes things like property, equipment, policies, and other assets.
Collateral is any valuable asset that a borrower pledges to secure a lender’s interest in approving the loan. It protects the lender’s interests if the borrower defaults, and the borrower’s ability and willingness to pledge valuable surety reduces the risk to the lender.
Sometimes the collateral is unrelated to the loan purchase, like a policy pledged for a personal loan. Other times, the loan purchase itself is used as collateral. For instance, when taking out a mortgage, the property is the collateral; and the vehicle is the collateral for an auto loan.
Below are the most common types of collateral accepted by lenders:
-
Real estate
-
Cars
-
Policies, bonds, and other investments
-
Business inventories and equipment
-
Accounts receivable
-
Cash, or savings and checking account balances
-
Conditions
In short, this factor considers several things, like the current economic climate and interest rates, when evaluating the risk to the lender. Overall, a borrower with good character, capacity, capital, collateral, and favourable conditions is more likely to get their loan approved.
A good credit score is not the only important thing. Lenders also consider employment, income stability, collateral, credit history, debt-to-income ratio, current income, and other factors. So you really need to maintain a good credit score, stable income, and employment.
Over and above evaluating a borrower’s financial status, lenders look at the specifics of the loan and the overall economic climate.
This includes the principal amount, the loan interest rate, and the intended use of the loan capital. However, lenders also look at factors like industry trends (with regard to a business loan) and any other conditions that might impact loan repayment.
Credit24 is here to help
Now that you know how lenders screen and assess loan applications, you’ll be more confident when applying for a loan. Credit24’s loan application is quick and easy. Jump onto their website today to find out more.
Source
