Looking for a Loan?
Have you recently applied for a bank loan or are you thinking about applying soon? If so, you are competing for credit in a market where funds are scarce! This being said, it is a great exercise to put yourself in a banker's shoes and to think:
"What are the most important things a banker will look at when considering my application?"
Traditionally, banks weigh the Five ‘C's' when evaluating credit applications: Character, Capacity, Capital, Collateral, and Conditions.
Character: What kind of person are you?
- The credit report. Banks are going to assess whether or not you are someone who has paid their debts regularly and on time. With the economic crisis, banks are much stricter and will demand a payment history that is not tainted by late payments and past-due amounts. Before you apply for credit with a bank, review your credit report at Annual Credit Report.
- References and Credentials. It may be that a bank feels the need to do further investigation on your personal character and is authorized to obtain information from your personal and professional references.
Capacity: Do you have sufficient coverage to make the monthly payments for a loan?
- Money available. It is important for the bank - and for you as well- to know that you will have sufficient funds to repay the loan. Upon approaching a bank, they will analyze not only your income, but your expenses as well. During these days of economic hardship, the bank will pay very close attention to your mortgage payments. If you have a mortgage with an adjustable interest rate, or ARM, it will be much more difficult to obtain financing from a bank.
- Stability of income. Do you have a stable income? If you have a job, the more stable the industry you are working in, the better. Remember that if you are working in the financial industry, it is one of the most risky to be involved in today.
Capital: How much money could you come up with if needed?
- Liquidity. If you sold all of your properties, repaid and charged off all of your debts, how much capital would you have left over? Banks place a lot emphasis on this because it is an indicator of how much money you could obtain if you were to encounter any problems. If you still have capital intact, this will help you greatly when applying for a loan.
- Capital invested into your business. If you are applying for a small business loan, the capital that you have personally invested into the business is an indicator of how much risk you have taken to ensure that the business succeeds. Banks prefer to share the risk!
Collateral: What can you offer to guarantee your loan?
- Goods. Because the lending environment is extremely competitive, it is worth thinking about what you could offer as a guarantee for the loan. Think about all that you have; for instance automobiles, equipment, etc. that can serve as acceptable collateral to guarantee a bank loan.
- Co-signer. A good alternative is to look for someone who could sign on to guarantee the loan. A co-signer is a person who would promise to pay the loan if for some reason you were unable to pay it.
Conditions: How does the economic crisis affect you?
- Economic climate. In the current economic climate, bankers are especially concerned about volatility in the labor market. If people are losing their houses, businesses, and jobs, the bank is going to take into account the likelihood of how they will be negatively impacted. For example, if the industries most affected by the economic crisis are finance and consumer products, the bank will take greater caution when assessing risk if you work in these industries and are applying for financing.
With this information in mind, try to make your application as solid as possible. Nothing can guarantee that you will be approved for bank financing, but knowing how bankers make decisions can help you to know how to position yourself when you apply for a loan.
Good Luck!
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