Most people cannot operate well or manage their life goals and major expenses without taking a loan. To get the loan approved is not always easy. Many people do not know what all it takes to get a lender to approve a loan. Lenders can reject a loan application due to many factors, depending on your credit history and score, reputation of parties involved, in case of a house loan - the location of the property matters and your relationship with the lender also is crucial. In fact, sometimes two persons with same credit score may go on to discover different outcomes for their loan applications. Some lenders have internal scores to see if a person is eligible for the loan. Here are some of the most common things banks look at before approving loans.
- Credit History
Lenders always prefer people with clean financial habits. A credit score tells a lot about your financial health. Default status can be easily checked through your credit report especially from data maintained by different bureaus. If your credit score is less too low, there is a high chance that your loan application will be rejected. If you have a good credit score from a credit bureau, you could get your loan faster and with fewer checks by the lender.
There are some occupations that some lenders prefer. For example, in many government banks, government and Civil employees are most preferred as they have a stable job. After government employees, lenders prefer people working with blue-chip companies and doctors. Further down the line come chartered accountants, engineers and lawyers. People working in private companies and self-employed get the lowest scores. Occupation is one of the important factors taken into consideration while appraising a loan, especially high value loans like home loans. It is important because repayment capacity depends on the income of the person. For example, in case of a person working in a certain company which has a poor history of paying salaries/dues to its employees, the loan application is weakened. Similarly, a borrower switching jobs frequently gives a negative impression. Also, every application is treated equally irrespective of whether it is of a government or a private sector employee because each one has its merits and demerits.
Age is another criterion that lenders look at before giving a loan. To give you an idea, people in the age group of 30-50 years are most preferred as they are considered more financially stable. They also have a decent number of working years left to repay their loans. On the other hand, people above 60 fare the worst in the internal scoring model of lenders.
This primarily is a factor to consider for home/property (land) loans. Lenders also consider the distance of the property from the financing branch while sanctioning a loan. For example, according to one of the public sector lenders, a property within city municipality limits or in the same city or town is the most preferred. If the property is very far, lenders tend to hesitate in approving a loan.
5. Work Experience
You must have noticed that lenders ask you for how many years have you been working with your current company. This is because the longer you serve the more points you earn with the lender. For example, people working for more than 15 years are preferred over those with an experience of up to 10 years. Lenders prefer people who have been serving in a company for at least three years.
6. Spouse's/Next of Kin Income
This is more the case for home/land loans. Home loan eligibility goes up in case of joint home loans as the repayment capacity goes up (depending on the income of the co-applicant). Assume that you would like to buy a property worth Kshs.10 Million. The lender will usually fund up to 80 per cent of the cost, which comes to Kshs. 8 Million. If your income cannot support such a high loan burden, you will be forced to look at a house that costs less.
However, if your spouse is working, both yours as well as your spouse's income will be considered to determine your repayment capacity.
7. Repayment Period
The shorter the repayment period, the more your lender likes you. For example, several lenders give maximum score to people who opt for a relatively shorter repayment period. So, the next time, try to shorten your loan period if approval becomes difficult. However note that a shorter period will result to a higher installment repayment amount. Make sure you can afford it otherwise default costs will kick in!
8. Relationship with the lender
The older your relationship with the lender, the higher are your chances of getting the loan approved. Lenders value their old customers due to familiarity with the financial past. A person who has been with a lender for more than 10 years is definitely preferred over the one with no previous relationship with the lender. This is even better if the borrower has successfully repaid previous loans.
9. Purpose of loan
In case of a home loan, you earn more points if you are buying a ready-to-move house. An under-construction house is considered more risky as there is a chance of the builder delaying possession or failing to get all the required approvals from government agencies. Similarly, it is most easy to get approval for renovation and repair of a house and more difficult to get a loan for land and construction of a house on it.
10. Surplus Income
Your lender likes it if you have enough surplus after paying your installments. Low surplus conveys that you are financially stretched and so are more at the risk of defaulting. To give you an example, a ratio of five times and above earns you the maximum points, as it depicts a healthy financial life. So, apply for a loan by looking at the above-mentioned criteria and save yourself the trouble of running from pillar to post.