When taking a look at how loans are processed, we have to consider three principal factors in the equation. These logical steps are how banks and other finance companies will determine an applicant’s ability to finance the loan and their suitability for the application to be approved. Although these procedures are now almost always performed by a computer, the concepts are still the same as when each was performed manually.
The first step a prospective lender will take when processing a loan application is to consider the applicant’s ability to finance the loan. This involves looking at the applicant’s income against their fixed expenditure. Expenditure will include such as mortgage payments and other finance payments, as well as taking account of any of these payments were are to be eliminated through consolidation as a result of the new loan. There will usually have to be a fixed percentage of the applicant’s income remaining unaccounted for when the calculation is completed in order for the application to proceed to the next stage.
Credit scoring is often a little understood concept and the reason why many people will ask, when making a loan application, “Why do you want to know that?” Credit scoring is essentially an evaluation of someone’s present life circumstances and the stability of their finances. Questions asked in order to complete credit scoring will include how long a person has lived at their address, how long they have been with their present bank and how long they have worked for their present employer. Each answer given is essentially scored by allocating it a points total and a predetermined number of points has to be reached for the application to continue.
If a loan is successfully processed through the first two stages, the lender will then perform a credit referencing search upon the applicant. This is where a search will be made with one or more of the large credit referencing agencies such as Experian to check for any bad credit reports or court judgements made against the individual within a period of a past number of years. If such records are found, the applicant will have a chance to explain the reports, query them with the credit reference agency for a nominal fee and perhaps appeal the decision.
Only when these three stages have been completed will a loan have been fully processed and the applicant notified of the decision accordingly.