Getting a loan is easier than many people think! The reason for this is that net interest income is an important source of revenue for every bank and financing partner. Since a loan is very easy to plan and is not subject to price or valuation risks, it is a combination of trust and future calculation.
Every granting of credit is based on trust and future calculation
Anyone who wants to engage oneself in the lending process and wants to internalise its individual steps should start with the nature of the loan. For most loans, the amount and payout date as well as the due date and amount of the instalments are already determined when the contract is signed. Basically, the credit provider must be sure that the borrower really intends to repay the loan. Otherwise he/she would have to initiate dunning procedures, which often involve a great deal of effort.
Consequently, most credit providers check the repayment ability and the willingness to repay before approving a credit card. The repayment ability is calculated by using the monthly income minus the estimated or actual living costs.
Therefore, the credit application process contains the following steps:
- Verification whether there is a sustainable monthly income which can be used to cover the monthly instalments. For this reason, the bank or financing partner requires current information about the monthly income. This can be an employer’s salary statement, the pension statement or the tax statement for self-employed borrowers.
- Based on these numbers, the bank or financing partner calculates whether the monthly disposable income after covering all living expenses would be sufficient to cover the new loan. If this amount is too low, a loan with a longer duration or a lower loan amount can be proposed.
- If the numbers add up and a loan COULD be granted, the finance partner wants to assess the risk more closely. This assessment can be based on the occupational situation, such as income or length of employment, but it can also take into account the previous experience of other financing partners. If the borrower has previously not repaid loans in time, the new lender likely will assume that the next loan could also be burdened with significant additional work. As a result, a risk markup may be added to the regular loan interest rate.
The process of granting a loan varies depending on the amount of the loan and the company granting the loan. There are some banks, for example, which do not pay much attention to the creditworthiness when granting smaller loans and generally charge higher interest rates. Consequently, their risk balancing assumes that problematic loans do not only account for the usual 1 to 2 % of all exposures, but constitute a higher proportion. The interest earnings then more than offset this problem within the framework of risk spreading.
All trustworthy banks and finance partners do not charge any fees for this processing, so the borrower can easily compare and invite one or two offers.
With the implementation of online loan comparisons, loans have become even cheaper
Before the implementation of online loan comparisons, retail loans were considerably more expensive than today. This is not only due to lower capital market interest rates, but also to significantly more competition. The times when there were only two or three banks in town which almost simultaneously lowered and raised interest on loans are over.
Instead, the age of credit comparisons is characterized by two factors influencing the interest margin: previously only regionally active banks can now operate nationwide and thereby expand the total volume and interest margin. On the other hand, the interest rate premium for personal loans has decreased as customers have become more self-confident and actively compare offers.
Once the loan application has been processed and the bank or financing partner has decided to offer a loan, it has to be ensured that the loan is exclusively paid out to the borrower him/herself. Once this has been done, the loan is ready for disbursement and will be on the borrower’s account within a few days.