I’m sure you already heard that from a friend or from a family member: “the bank declined my loan, they don’t know what their doing!”. Banks and other financial institutions are often seen as the bad guy who doesn’t understand. This situation often occurs because most people don’t know how loans workout. I have a Swedish friend who works in a bank and told me how it works. They basically look at a loan application with the following questions in mind:
#1 Who are you?
The first question is related to the person who applies for a loan. The banker wants to know where you work, for how long, if you are married, have children, etc. This helps him drafting a portrait of the kind of person you are. The point is to know if you are in a situation that you will need more credit later on or if you are relatively stable. Loan officers love when someone is stable, it makes credit behaviors predictable.
#2 What have you done so far?
Then, the banker will look at your balance sheet. If you have been working for the past 20 years, he will expect to see some assets. If you ask for more credit and you show a negative balance sheet (more liabilities than assets), your chances of getting the loan are not very good. Usually, cars, furnitures and jewels are not accepted as asset in the eye of a financial institution. They will most likely look at your bank account, investments and real estate properties.
The financial institution will also pull out a credit bureau to see which kind of payer you are. A bad credit is a direct breach of confidence in your relation with the bank.
#3 How will you pay your loan?
Finally, the banker wants to know who you will pay off your debt. This is often a misconception from the population who has assets, but little revenue. If your house is free of debt but you don’t work anymore, it will be harder to convince the lending firm to give you a new mortgage. In the end, the banker doesn’t want to take back your house. He is not in the housing business, he is in the lending business. He wants to make sure you have an income stream that is sufficient to pay for your living and reimburse your debts.
A quick tip to get approved
My friend finished his explanation with a great tip to put all your chances on your side to get approved for you loan: tell the truth! A good explanation of the worst situation is better than a good lie. Most bankers will read you and find out about your lie instantly. Then again, lying to a financial institution will definitely not get your loan approved!
Financial professional and online entrepreneur, I'm best known as The Financial Blogger. I want to make money because I like enjoying life the way it should be; with a lot of great food and wine! I also love to spend time with my lovely wife and 3 kids!
