Depositing money from the customers and lending it to those who need it is the basic working procedure of a bank or a financial organization. In this way, they run their organization. If the investment they are making in a loan turns out to be a bad one then the financial organization will face losses. So the organization follows a few steps to determine if the loan will give then return or not. For this, they follow some steps. To be precise there are 6 steps the institutions follow before giving any loan. Thus the 6 steps in the lending process are:
- To find customers for loan
- Evaluating the purpose of the loan
- Checking the customer’s credit score and visiting the site
- Checking the customer’s financial condition
- Evaluating the collaterals and signing the agreement
- Monitoring the loan agreement
Let us discuss the steps in detail.
The 6 Steps In The Lending Process
1. To Find customers for loan
In the case of an individual loan, the customer visits a bank or other lending organization. He requests for a personal loan to the respective staff of the organization. The employee then asks him to fill up a loan application form to forward his request to the concerned department.
But the bank or financial institution wants to increase its market. They don’t just depend on personal loans. To increase their business the employees approach the businessman and industrialists and asks them if they want financial assistance. They do it to grow the business. This happens in the case of established businesses.
2. Evaluating the purpose of the loan
After seeing the loan application forms, the loan officer arranges a meeting with the customer who is showing interest in taking a loan. In the meeting, the loan officer asks the customer to explain the purpose of the loan. The motive of the question is to evaluate the customer’s sincerity and character.
If the customer satisfies the loan officer then the request goes to the next step. If he fails to impress the officer with his answer it could cancel the loan request. So the customer should prepare himself before the interview. He should have a genuine purpose otherwise the bank won’t entertain the loan request.
3. Checking the customer’s credit score and visiting the site
The third step amongst the 6 steps in the lending process is checking the credit score and visiting the site. Before approving the loan the loan officer has to visit the site to check the ground reality. The purpose of the visit is to check the property, the location of the property. Without visiting the site the loan officer cannot forward the process.
The loan officer also checks the credit score of the potential customer. For this, he contacts his previous creditor and asks about the experience they had with the customer. He also checks the payment records of the previous lender. It gives him valuable information about the customer. The records show the character and sincerity of the customer. It also shows his responsibility towards the institution that is lending him money.
4. Checking the customer’s financial condition
Visiting the site and checking the customer’s credit score, the loan officer asks the customer to submit a complete financial statement to evaluate the loan request. In the case of an organization, the lender asks the company to submit a directors’ resolution that authorizes the negotiation of a loan.
After the collection of the necessary documents, the file goes to the credit analysis division. They check if the customer has enough cash flow and assets to repay the loan. If they find it satisfactory then the file goes to the loan committee for approval. In the case of large loans, the credit analysis committee gives a presentation to the loan committee about the pros and cons of the loan request. If the loan committee thinks that the loan request is fine then they approve the loan.
5. Evaluating the collateral and signing the agreement
Another step from the 6 steps in the lending process is evaluating the capacity of the applicant. When the loan committee approves the loan request, it asks the customer to give document papers of his assets which the bank. The financial institution takes these as collateral if the customer fails to repay the loan.
If the loan officer and the loan committee find the loan and collateral proper and satisfying he makes an agreement. They prepare the note and other related documents. All the parties responsible for the agreement sign the document. Thus they pass the loan.
6. Monitoring the loan agreement
The loan officer constantly monitors the agreement and makes sure that the customer is fulfilling the terms and conditions of the agreement. He also checks if the customer is paying the principal and the interest as per agreement. In case of a commercial loan, the loan officer periodically visits the firm to check its progress. He also checks if the customer needs any other services from the lending organization.
There is a computer database of customers. In this database, the loan officer or other staff enters information about the loan. The information is the loan amount, what services the customer is using, the financial position of the customer, and if he needs further assistance from the organization.
These were the 6 steps in the lending process. The lending organizations lend money to make a profit. It helps them to run the business. So the company will check the potential of the customer before they offer him a loan. They don’t want to land in a bad investment.
The financial institution takes deposits from the customers and uses them to give loan who needs it. Thus they earn money to run the business. So they need to invest it properly. Otherwise the financial instituting will face losses. Share this article if you find it informative. For further information comment in our comment box below.