Planning to buy a new house? Do you want to get the latest car model, but you have empty wallets? Well, your first approach, in this case, would be to reach out to a bank for a loan.
Banks work by getting money from depositors and, in return, lending money to the borrowers. The money that is deposited in a bank does not stay there in a locker. It has to flow from one person to another. That is how a bank works.
However, a bank does not sanction loans to everyone who comes in the way. The commercial banks follow a well-organized and strategical approach to lend money following a systematic procedure.
Factors Determining Loan Approval
If you plan to contact your creditor to get a bank loan, you should read this article till the end. We have shared the top 7 factors banksconsider before sanctioning loans to borrowers.
Also read: What Happens When You Default on a Loan?
Below are some of the most common factors that should be considered before granting loan to borrowers.
1: Credit History of the Borrower
When you default on a loan, your credit history is impacted in a significantly negative way. You are considered a defaulter. If you do not possess good financial habits that are not suitable for a bank, your application for sanctioning a bank loan will get rejected in the first go.
The credit history and bank statement are the first factors that should be precisely considered by a banker before sanctioning a bank loan. Credit history is a great indicator that can help the company predict future financial behaviors.
A credit score defines if the person has been a right and punctual customer who is regular with repayments or not. If the borrower has a general credit score of 700 or 800, the chances are high that his request for a loan should get approved by the bank.
Nevertheless, if the score is below 300, the bank should not consider sanctioning a loan. Ensure that you, being a banker, only consider people who have maintained a good and positive credit score by the bureau.
2: Maximum Profit Achievement
In the financial sector, the only corporate with a history of running to make the maximum profit is a bank. It is quite evident that the significant element when successively retaining a bank is to earn the most of the profit.
There are numerous charges that a bank has to pay. Some amount to the depositor, some to the shareholders, interest to the account holders, and other taxes. All of this could not be paid if the profitability level of a bank is less.
Therefore, when sanctioning a bank loan, a banker must use the funds in a way through which he has the best chance of gaining profit. Profit is essential and essential to growing the business. Not giving unnecessary importance to this aspect, but it should not be ignored completely.
3: The Purpose of Requesting a Loan
When a borrower requests a loan, all of the information regarding his purpose to ask for a loan’s sanction is visible to the bankers. When acting as a person responsible for lending the money to the borrowers, a banker should consider the borrower’s purpose and goal.
Examine the reasons for which the borrower is taking a loan. Is he going to invest this money in a productive matter? Is he investing in his business? Can the company grow in the coming days?
Wondering why?
Well, if the borrower has industrious plans, your chance of getting the payment back from him would consequently increase, and there will be fewer chances of defaulting on a bank loan.
4: Resources of Paying Back
After briefly monitoring the borrower’s credit score and financial history, a bank should look for the borrower’s sources of income. Before sanctioning a bank loan, a banker should analyze the sources through which a borrower can pay back the money.
Is he a well-reputed businessman? OR Is he a customer who wants to have some money to improve his lifestyle?
After making a complete analysis, the banker would ascertain the chances of repayment from the borrower.
5: Responsibility Level of the Borrower
Before sanctioning a bank loan, a banker must interview the borrower. Ask him specific questions about his life, his moral values, and his approach towards social welfare.
Also read: What Is An Installment Loan? [A Beginner’s Guide]
Apart from focusing on the security offered by the borrower, make him creditworthy. Finances should handle such situations in a discreet manner. After analyzing the borrower’s technical competence, the bank will get a better idea before sanctioning the loan.
6: Not All at Once
There is a famous saying; one should never give everything to someone in the first go. The same could be applied when running banks.
Before sanctioning a bank loan, a banker should make sure that he can only lend a certain amount of money to the borrower. Avoid giving all of the money to the borrower. This could increase the risks of not paying back to a great level.
All of the money paid in the form of a loan at once would leave the corporation in a considerable threat of not getting a single penny back from the borrower that could broaden the hazard and danger.
7: Short-Term Loans
Like not giving the whole amount at once to the borrower, banks should consider another factor when sanctioning a loan to someone lending money for a shorter period.
Also read: Home equity line of credit vs home equity loan
To decrease the adverse effects on a bank’s business, make sure that a bank only pays deposits to the borrower with a restricted time limit under which he has to pay the whole amount back.
Before sanctioning a bank loan, a bank can save itself from going into a loss by considering the above factors.
