What Do Banks Really Look For in Your Loan Application?
In this text, we will attempt to answer the question: What banks usually access to review your loan application?
As with any major purchase, there are certain considerations you should make prior to applying for a loan. Not all lenders operate the same way; however, most have similar criteria when reviewing loan applications and approval or denial decisions. Knowing which banks usually review these applications can reduce stress significantly if approval for credit takes longer than anticipated.
Lenders typically conduct credit reports to evaluate your financial history and gauge your capacity to repay loans. They use various metrics – debt service coverage ratios and household income limits are often employed – but what really counts is how well you have been repaying past loans – missed payments and large balances being flagged by lenders are red flags; maintaining good standing with creditors should remain your goal.
Banks will consider your employment status and stability, along with savings and investments when considering personal loans. They may require an independent appraisal of the property for which you’re borrowing money to ensure its worth the price; in certain situations, external collateral such as a car or home may also be necessary as security for these loans.
Lenders offering business loans will consider the financial strength of the business by reviewing its balance sheet, which should include accounts receivable, inventory, cash, equipment, commercial real estate and any existing liens against assets – this could hinder recovery efforts should default occur. Lenders also evaluate economic trends as well as any proposed legislation which may impact upon it in the near future.
At times, lenders will take into account a borrower’s character and capacity when reviewing loan applications. With mortgage loans this means evaluating factors like how long you have been employed at their current job, salary/benefits offered, affordability of payments etc. With other loans however, banks will evaluate your references to ensure you are trustworthy borrowers.
Banks evaluate loan applications using the five Cs: credit, collateral, capital, character and conditions. By providing information and documentation outlined above, it will increase your chances of qualifying for the terms you desire. Just be honest when filling out your application; lenders can quickly spot inconsistencies or lies when reviewing an application; one banker noted how some small business borrowers try to sell their businesses to him by overstating income and understating expenses on tax returns – something which erodes trust between applicant and lender and ultimately diminishes chances of loan approval.
