Thinking of buying a new home? Want to buy the latest model car but the wallet is empty? Well, in this case you will get a bank loan first.
Banks operate by taking money from depositors and thereby repaying loans. Bank deposits are not locked. You have to transfer it from one person to another. This is how banks work.
However, banks do not refuse to lend if they hit the road. Commercial banks are organized and follow regular and orderly procedures for lending.
Factors Determining Credit Approval
If you are thinking of approaching a lender for a bank loan, you must read this article till the end. We have told borrowers 7 major pitfalls of banking before lending.
These are the most common factors that lenders should consider before taking out a loan.
1: Credit history of the borrower
Your credit history is greatly affected when you pay off debt. They are considered criminals. If you do not have financial habits that are not suitable for the bank, your bank loan application will be rejected.
Credit history and bank statement are the main factors that banks should consider before approving a bank loan. Credit history is an important indicator that helps predict the future financial performance of a company.
A credit score indicates that a person is a regular consumer and has been paying on time or regularly. If the borrower has an overall credit score of 700 or 800, the loan application is more likely to be approved by the bank.
However, if the score is below 300, the bank should not consider closing the loan. As a banker, make sure that you only see people with good and positive credit scores in the office.
2: Maximize profit
Banks are the only companies that have a history of making the highest profits in the financial sector. Of course, the main thing is to maximize the profit when owning the bank.
Banks have charged too much. Amount of interest and other taxes for some depositors, some shareholders, accountants. All these payments cannot be made if the bank’s profitability is low.
Therefore, while refusing a bank loan, the banker should use the money in such a way as to earn more profit. Profit is important and necessary for business growth. This aspect should not be emphasized, but it should not be ignored.
3: Purpose of loan application
When a borrower applies for a loan, all information about his intention to borrow is shared with the banker. Acting as the person responsible for repaying the loan, the banker must consider the borrower’s goals and objectives.
Read the borrower’s reasons for the loan. Will you use the money for practical purposes? Do they invest in the business? Can the company grow in the future?
what do you think
Well, if the borrower has a serious plan, the chances of getting the money back will increase and the chances of the bank getting out of the loan will decrease.
4: Payment Process
After looking at the borrower’s credit score and short-term financial history, the bank should check the borrower’s source of income. Before approving a bank loan, the banker must analyze the sources from which the borrower can repay the money.
Is he a famous businessman? Or have a client who wants to make some money to improve their lifestyle?
After a thorough analysis, the banker determines the repayment capacity of the borrower.
5: Level of Borrower Liability
Before approving a bank loan, the banker must interview the borrower. Ask them specific questions about lifestyle, moral values, and attitudes toward fitness.
Apart from paying attention to the security offered by the borrower, get it right. Taxpayers should approach such situations with caution. After analyzing the technical performance of the borrower, the bank will have a better idea before sanctioning the loan.
6: Not all at once.
There is a famous saying; First of all, nobody should give anything away. The same can be applied while managing banks.
Before approving a bank loan, the banker must ensure that he can repay the borrower only a certain amount. Avoid going into debt at all. This can significantly increase the risk of non-payment.
All the money given as loan at the same time will expose the company to the risk of not being able to recover even a single amount from the borrower which increases the risk and exposure.
7: Short term loans
Another factor banks have to consider while approving short term loans to borrowers is that the entire amount is not given to the borrower at once.
To minimize the negative impact on the bank’s business, ensure that the bank only repays the borrower’s deposits within a specified period within which it must repay the entire amount.
Banks can protect themselves from losses by considering the above factors before sanctioning the loan.