Banks are in the business of supporting sound and viable financial decisions, therefore every request must be considered on its own merits. Banks have to consider risk and return and ask, is this a viable proposition?
When preparing the loan application consider what the potential lender needs in order to assess your application. Some of the questions you need to answer in the loan application include:
- What is the purpose of the loan?
How much do you want to borrow?
- When will the funds be required?
How long do you need to borrow the funds for?
- How will the loan be repaid?
- What is the risk to the lender?
Some of the applications a bank receives will not be approved, simply because the risk the bank is required to carry is too high, or because it believes the applicant cannot support the risk.
Banks are required to make prudentially responsible lending decisions by the Australian Prudential Regulation Authority (APRA). This means, for every loan application, a bank must consider the risks it is taking on and the risks the borrower is taking on, including a borrower’s ability to repay the loan. The more risk the bank takes on, the more capital it has to hold against a loan.
The 5 C’s
All potential lenders will also consider what is commonly referred to as “The 5 C’s” to assist in identifying the level of risk they will be undertaking.
The following table explains what the 5 C’s are and what information you can provide to help with their assessment of risk.