How do Lenders Evaluate Loan Applications?

Whenever a lender sanctions a loan there is a certain level of risk involved. This is because if the loanee defaults, then it can be difficult to get the money back, especially if there is no collateral.

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To avoid complications, the lenders evaluate all kinds of aspects of the applicants before giving the final approval. Some of these are:

Credit Usage

This pertains to the credit history of the applicant. Some of the factors that are taken into consideration include whether they have taken a loan or used credit cards before, their credit score etc.

Capacity

If the credit history of the candidate is decent, then comes the next question- do they have the capacity to repay the loan at all?

This is based on the nature of their job and monthly earnings. For instance, if an applicant has applied for a loan of Rs. 50 lakhs but their monthly income is merely Rs. 20,000 then it will be really difficult for them to repay it, even with a long loan term.

Collateral

The lack of high income or credit history can be sometimes overlooked by a lender if the applicant can offer collateral. For instance, if the person seeks a home loan, then the same home can be linked as a collateral. This will allow the lender to seize the property in case the loanee defaults in the future.

Enquiries

Whenever a person applies for a loan a lender usually sends an inquiry for their credit report to a credit bureau. This is recorded as a hard inquiry on the person’s credit report.

If there are many inquiries mentioned in an applicant’s credit report then it may suggest credit-hungriness, which is a bad sign.

The aspects mentioned above are some of the few that are taken into consideration by the loan lenders. However, the actual process may slightly vary from one bank to another.