How banks and non-banking financial institutions make loan decisions?

 

 

If you have ever been denied a loan, you probably know that banks never provide explanations as to the reasons behind the refusal. On the other hand, if your request was accepted, you certainly did not wonder why. But in reality it is very useful to understand what the process is after which banks are guided when granting credit.

Credit score and credit history

Credit score and credit history

The first thing banks look at when evaluating a potential borrower is salary. To receive a loan, you must have a stable salary, which will allow you to repay the loan taken monthly. This may seem obvious, but from our experience many clients are trying to get loans without having proper official income.

The second important condition has to do with credit score and credit history.

Both information is stored in your personal report based on data collected from the Credit Bureau. The credit score is the numerical expression of your credit history. If your score is 500, a score like that, then it means that your credit history is that way too.

The credit history includes all the data related to the previous and current loans – the amounts granted, the types of loan, the credit conditions, the payment delays and so on. Therefore, before applying for a new loan, it is essential to know your current score, available for the first time.

How can you see your credit history?

How can you see your credit history?

In the near future, Lender will make a complete history available to anyone applying for credit scores. At the moment you can also get this information directly from the Credit Bureau by filling out a request on their website.

What if you don’t have a credit history?

What if you don

Depending on the type of loan you opt for, this may or may not be a problem. If you opt for a mortgage and have a good salary, there is a chance that the bank will approve your loan application even in the absence of a credit history. This is because the bank protects its risk from the point of view of the real estate offered as collateral.

But if we talk about loans without collateral or co-debtors, a category that includes personal loans or credit lines, then credit history can be a critical factor. For more details, find out how to get your first loan even if you do not have a credit history.

What can your credit history negatively affect?

What can your credit history negatively affect?

Of all the factors that can affect the granting of a loan, the most important is the presence of old debts in the client’s history, as well as his appearance in the forced execution lists.

Also, repeated delays in the payment of previous debts can trigger alarms for creditors. Even if the customer has fully paid off their debts, these ‘stains’ will remain in their credit history for another 4 years from the date of repayment.

Finally, the clients with too many loans for the asset are also targeted. Someone with a salary of 3000 dollar and monthly debts of 2000 dollar is already in a dangerous situation. Ideally, a person’s rates should not exceed 30% of his earnings in any given month.

The own scores of the credit institutions

The own scores of the credit institutions

It should be borne in mind that, in addition to the information provided by the Credit Bureau, each credit institution has its own customer assessment models.

There are certainly credit organizations on the market that are not very demanding in choosing customers. They give loans even to people who are already with one foot in the hole because of debts. For such organizations, reimbursement through execution is an essential part of their business plan.

But we do not refer to those organizations here. Most lending institutions have their own customer scoring models, based on which they decide to grant loans to.

For example, our Lender customer assessment model takes into account factors such as:

  • The total value of the active loans
  • Net salary
  • Monthly expenses
  • Number of delays in repayment of past loans (delay periods 30 days +, 60 days +, 180 days +)
  • Presence on forced execution lists
  • Number of credit applications
  • City of residence
  • Number of institutions that have granted them loans in the past
  • Total amount borrowed in the last 5 years
  • The value of the credits contracted from the non-banking institutions
  • Age at the time of application

These factors and many others form our own scoring system, which is the basis for the decision to grant a new loan.

In addition, the number of features analyzed increases substantially with the introduction of automated customer analysis algorithms.

The role of AI in the decision to issue loans

The credit organizations have already switched to automated algorithms for evaluating clients and issuing loans. Lender automatically analyzes 88% of loan applications for personal needs.

What does this mean for customers? It means that from now on your application will be analyzed automatically based on the data entered. This system has both advantages and disadvantages. To find out more about the role of artificial intelligence in lending, read our article on how to grant loans using artificial intelligence.

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