There are many reasons as to why people approach banks and financial institutions to secure a loan. It could be to fund a new purchase, such as a brand-new car or house. Others need to borrow money in order to make more money, such as in the case of putting up new businesses or funding other income-generating activities. Whatever the case is, banks and lending corporations offer different types of loan solutions to meet the needs of the market.
Of course, these institutions or companies don’t lend money to just about anyone who approaches them. In order to protect their own interests as well as make sure that they also profit from the deal, banks require borrowers to comply with strict assessment procedures and requirements before they approve their loan application.
If you’re trying to apply for a loan and you’re wondering what factors can influence your application’s approval (or rejection), here are a few but very important things banks look at to assess your financial status:
Factors Influencing Loan Evaluations
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The Income You Generate as well as Its Source
If you want to borrow money, you need to have the ability to pay it back. Take note that it should be within your current capacity – not for “when you make the money” after taking out the loan. A lot of people insist that they need to be granted a loan to kickstart a money-making opportunity and feel that it’s counter-productive to ask for proof of good income before they even build anything. This is especially true in the case of business loans.
People go, “Well how am I supposed to bring in any money if no one would lend it to me.”
But the fact of the matter is that most startup businesses fail within the first couple years of operation – either because of a faulty or shortsighted business model or the owner’s lack of experience in the industry. It’s easy to say that you’ll pay back a loan but the reality of actually doing it is far different. This is why most lenders will not risk approving a loan based on a possibility; they have to make sure that you already have a stable source of income.
Financial institutions will look at your employment status and the stability of your other revenue streams (if any) to determine whether you are worth the risk. The more stable your income is, the higher your chances are of getting approved.
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Your Ability to Pay Back Loans on Time
Another thing they are going to take into consideration is your credit behavior which is largely reflected in your credit score (read more). If you run most of your daily transactions on a credit card and always meet your monthly dues, either by paying it in full or meeting the minimum amount due every time, your credit score will positively build up over time. This tells banks that you are a conscientious and responsible borrower who knows how to pay back the money you owe, and that you will likely exhibit similar behaviors towards this new loan that you are applying for.
If you tend to skip payments or default on smaller loans, your financial credibility is heavily damaged, and it can take years for you to rebuild your negative status. This will dissuade any lender from letting you borrow funds as you do not exhibit the qualities of a good creditor.
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Your Debt-to-Income Ratio
Next, let’s say you do have excellent credit standing and qualify as a good borrower. There is still a slim chance that you might not get approved for a loan based on current and existing debts that you already have. Banks will usually ask you to disclose any mortgages or loans that you are still currently paying and include those in their assessment of whether your current income can still support a new loan availment.
In fact, it’s a good sign when your bank takes this factor into consideration as it’s everybody’s loss if borrowers overestimate their ability to generate enough income to cover all their expenses in liabilities.
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The Purpose of Your Loan
One other factor that will affect the outcome of your loan application is your purpose for applying for one. If it’s to acquire or purchase certain properties of considerable value, banks may be more lenient as most properties, especially real estate, appreciate in value over time and borrowers defaulting on this type of loan is not as risky because financial institutions can repossess the property.
Personal loans, on the other hand, can be considered more high risk as the borrower is not asked to put any tangible asset on the line and he or she is borrowing money solely against his or her name. The assessment for this type of loan is heavily centered on character and credibility, which also usually means that the approval process can take longer.
If you’re borrowing money for a business, startup or expansion, the assessment usually focuses on the borrower’s business plans and their proposed strategies to generate good profit from the loan’s proceeds.
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Your Age at The Time of Your Application
Age is also a factor in loan evaluations. The borrower cannot be too young that his or her income capabilities are still far from stable or too old that the loan tenure might outlive the borrower’s life span. A good age to apply for a loan is often between the ages of 24 to 45 when people are expected to be the most productive.
If you do meet most of the above criteria, your chances of getting approved can be greatly reduced. More so if you are someone who does not have an extensive credit history.
Your risk profile is generally determined by your past or existing loans; this is summarized in the form of a credit score which financial institutions use as a basis to determine whether you’re a good and responsible borrower or not. If you do not have an existing history of credit, banks will automatically regard you as a high-risk client and will likely not approve you for bigger loans. This is why it is very important that you build your credit from a young age, ideally soon after you start earning your own income.
Now, if you do not have the luxury of time and you need a loan as soon as possible, i.e. emergency cases or to consolidate bigger, more expensive debt. There is a way for you to get approved faster and that is by applying for a secured loan.
What Is a Secured Loan?
A secured loan pertains to borrowing cash funds from a bank or lending company by using an asset as collateral. When you apply for a secured loan, you can often take out as much as 80-90% of your asset’s appraisal value.
These types of loans are often the easiest to process because there is a tangible asset binding the loan. This means that if you ever default on a contract due to non-payment, the banks have an asset to liquidate to cover the unpaid balance of your loan. Read more about it here: https:/billigeforbrukslån.no/lån-med-sikkerhet/
What Happens When You Apply for A Secured Loan & Use Your Home as Collateral?
One of the most commonly used assets to secure a loan is a house. In fact, not just houses but real estate in general can serve as good collateral for bigger loans. Residential and commercial properties appreciate in value relatively fast, and it hardly devalues over time. This is why banks and other lending institutions prefer to take real estate as collateral for big loans as it almost guarantees profits whether the loan is defaulted on or not.
Now, if you’re wondering whether you have to move out of your residence if you use the family home as collateral, the short answer is no. You don’t have to worry because no one will be asking you to pack up and leave soon as your secured loan gets approved.
While the property is binded to the loan agreement, it is still technically your property unless you are unable to abide by the loan’s terms. For example, if you are unable to make your payment dues for 2-3 consecutive months, depending on the loan agreement you signed, this may result in the bank acquiring your assets to settle your unpaid balances.
Therefore, when taking out a secured loan make sure that you have a well-thought-out plan on how you are going to pay the money back. To avoid defaulting on a secured loan, don’t apply if:
- You don’t have a fixed or stable source of income
- You are going to use the money to cover for everyday expenses
- You want to pay off high interest debts without a game plan to settle the new debt (you will only repeat the cycle)
- You want to use the money for leisure purposes
- You are going to lend the money to someone else
Just as you are applying for a secured loan, make sure that you secure a plan to pay it back as well to avoid losses. If you think that you don’t have the ability or capacity to commit to the monthly dues but still need the funds for emergency purposes, you might be better off selling the property at full price.
