What banks consider before giving you loan could be external or internal. Some banks offer internal scores that are used for determining whether a person is eligible for a loan.

External factors include credit history, the credit score, the borrower’s reputation, and the relationship that you have with the bank. 

In addition, you need to understand that loan approval is not a simple process. People are unaware of the requirements needed to get the bank to approve a loan. Given below is a list of what banks consider before approving or giving you loan.

What You Need to Know About What Banks Consider Before Giving You Loan

For banks, it’s crucial to collect accurate information about borrower income and assets. Your financial situation will be thoroughly examined and a bank will see that you are serious and capable of getting the loan.

When you contribute money toward your down payment, the bank will make sure they don’t come from another source (i.e., withdrawing from retirement savings). Therefore, banks consider a lot before giving you a loan.

9 Factors Banks Consider Before Giving a Loan to An Individual or Business?

Factors banks look at before lending money to individuals include:

1. Credit history
2. Purpose of the loan
3. Borrower’s age
4. Work experience
5. Occupation
6. Distance of the collateral
7. Repayment duration
8. Relationship with the bank
9. Additional income

1. Credit History

Banks always preferred people with good financial habits. How you manage your finances can be determined by your credit score.

By checking your credit report, which is maintained by different bureaus, you can determine whether you pay your EMIs on time or default.

The chances of your loan application being rejected are high if your credit score is below 300. The lender is more likely to approve your loan faster if your credit score is high.

2. Purpose of the Loan

Banks would want to know the reasons you are taking up a loan. On the application form, you would clearly write the purpose of the loan. If your reasons are not valid enough, they won’t grant your loan. 

3. Age

Banks also consider the age of the borrower before giving them a loan. People aged 30 to 55 years are most favored, since they are considered more financially stable. Meanwhile, people over 65 score poorly on the internal scoring models of banks.

Age 18 and above are allowed legally to apply for a loan once you have a means of repayment. Teens below this age limit are not considered.

4. Work Experience

It is common for banks to ask how long you have been working for your current employer. This is because the more time you spend in the bank, the more points you earn.

For example, they prefer people working for over 10 years over those with an experience of up to 5 years. Banks also prefer people who have worked for at least two years in a company.

5. Occupation 

Banks prefer certain occupations. Often, government and public sector employees are preferred as they have stable jobs. The banks prefer people working for big companies, lawyers and doctors after government employees.

Those who are self-employed and those who work in private companies get the lowest scores. While appraising a loan, occupation is an important factor to consider.

A person’s ability to repay the loan depends on his or her income. Borrowers who switch jobs frequently give a negative impression. 

6. Distance of the Collateral

Banks also considered the distance of the collateral from the financing branch while sanctioning a loan.

According to some banks, a security within the county limits or in the same county is the most preferred. If the security is very far, banks hesitate in approving a loan.

7. Repayment Duration

A shorter repayment period is what all banks like. Many banks offer maximum scores to people who choose a repayment period of up to five years. Between seven and ten years, it is cut in half.

Those who choose a payment period from 10 to 20 years enjoy the lowest interest rate. Therefore, if approval is difficult the next time, try shortening the loan period.

8. Relationship With the Bank

You have a higher chance of getting approved for a loan if you have a long relationship with the bank. Banks due to their familiarity with past financial transactions value old customers.

They definitely prefer someone who has worked in a firm for over five years to the one with no prior relationship with the bank.

9. Additional Income

Your bank will appreciate you having a surplus after paying your EMIs. Low surplus shows financial distress, making you more at risk of default.

Considering the above criteria when applying for a loan will save you the trouble of running from one individual to another.

7 Factors Banks Consider Before Granting a Loan to a Salary Individual?

Banks consider the following factors before lending money to salaried professionals:

1. Credit Score
2. Current income
3. Employment history
4. Occupation
5. Repayment history
6. Amount of Loan
7. Reason for the Loan

Why is it Important For Banks to Collect all Loan Requirements?

Banks ask for all information because it helps them make a more informed decision to grant you a loan. In order to decide whether a bank will grant you credit solely based on your income or if they will require security, they would review your income history.

Note that crossing the “t” and dotting the “I” is very important while filling the application form. In order to qualify for a loan, you must be able to provide enough data to support all loan requirements, demonstrating that you have the financial means to repay the loan.

9 Bank Loan Requirements You Must be Prepared to Get

The lists below are what a typical bank will expect from a small business loan applicant:

1. A write-up stating the reason for the loan
2. Written business experiences
3. Business plan
4. Copy of credit history 
5. Presenting documents showing all personal information 
6. Recent copies of bank statement 
7. Collateral or security 
8. Cash flow
9. Information on various Outstanding loans 
10. A guarantor 

Conclusion 

Banks evaluate loan applications with the help of various factors. Understanding what these factors are can improve your chances of being approved.

Consider improving any of the above factors before you apply if you think they will hurt your chances of approval.

Moreso, it is also important you know the requirements for each time of loan and present all documents required.

Interesting read: How to identify loan scams and fraudsters.

Every business needs a steady cash flow to keep it running at its apex. Cash flows are intermittent. All businesses crave for growth and this gives them more advantage. For customers to come, everything must be in place and consistent. Therefore, for your cash needs, fast growth and development, you need funds and you can get funds through a bank overdraft. Get access to finances to solve your short-term needs and give your business more capabilities. 

What is bank overdraft 

It is a financing for individuals from SME, corporate sectors and other sectors in Kenya to manage and fill their cash flow gaps. Here banks allow you to draw more than what is available in your account. Customers waiting to collect debts honour this type of financing to keep their working capital obligations at a consistent level. They also know bank overdraft as a financing rendered to customers to help them meet their day-to-day capital engagements. 

Conditions

1. Most banks operate based on customers providing a security when their salary is not channelled to the bank
2. They charge interest on the amount collected/drawn 
3. Renewal is mostly a year for most banks.

How does an Overdraft facility work?

If you get an overdraft account with a bank, you will receive the overdraft you apply for, just as you receive loans. When you have been pre-approved for the overdraft, you can withdraw money whenever you need it. You can withdraw up until the agreed limit. By withdrawing the funds, you increase your outstanding on the account and only decrease when you deposit funds into the account. From the time you borrowed until you repay, you will be charged interest by your bank.

Overdraft system allows you to repay money in full or partial. After repayment, you can also withdraw money again until the limit of the overdraft is reached.

Eligibility criteria

1. 18years and above
2. Possess a national ID
3. Have a valid bank account 
4. own a valid phone number
5. Must have developed and kept good accounting conduct for months(this peculiar for companies)

Requirements for individuals 

1. Filled and signed application form
2. National ID card/KRA PIN/passport
3. Bank statement covering six months
4. Email address
5. If secured, provide a security details
6. Customer’s physical location 
7. Utility bill
8. Valuation report
9. Certificate of incorporation 
10. Reasons for drawing overdraft 
11. Guarantors details if requested for

Requirements for companies

1. Properly signed application form
2. National ID and PIN copies of all directors
3. Three (3) years audited account 
4. Guarantors personal guarantees
5. Cash flow projection for 12months
6. Six months bank statement 
7. Copies of valuation reports
8. Certificate of registration 
9. Recent management account 
10. Debtors and creditors aging
11. Copy of amount returns
12. Company PIN and VAT
13. An open account 
14. Proposal for borrowing 
15. Audited accounts

Rates and fees

1. Interest rate
2. Favourable negotiation fees
3. Commitment fee (Most banks charge this)
4. Price prime rate (charged by some)
5. Facility fee(some banks charge this)

Features

1. A budget for short-term financing 
2. A simple financing process
3. Very convenient to operate and monitor
4. Interest is charged on amount drawn
5. You repay when you have the money
6. They allow joint borrowers to draw overdraft

Benefits

1. Competitive interest only charged on amount 
2. One can access both secured and unsecured overdraft
3. Some banks offer overdraft in Kenya in dual currencies 
4. Gives you immediate cash 

Who qualifies for a bank overdraft?

Anyone from 18years and above and earning a reasonable amount of money can get an overdraft loan.

How do I get a bank overdraft?

To get an overdraft, you need to have a salary account with the bank in question. For self employed, you also need to open and operate an account with the financial institution. You can go further with the process by presenting all other necessary requirements. 

Conclusion 

Overdraft facility allows a borrower to apply and withdraw funds in his/her account and repays when the fund is available. They charge you interest on the amount drawn and used not the whole limit. The borrower can take an unsecured overdraft without using collateral. However, if the borrower takes an overdraft against his/her assets as collateral, then it is a secured overdraft. Assets used can vary, and each bank can demand a unique asset for an overdraft. Also note that the interest rates charged and overdraft amounts limit approved by banks vary depending on the collateral.