How the Banks assess a loan application

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.

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The 5 C’s

Click each heading to find out more

Character

The borrower’s reputation, integrity and ‘willingness’ to repay.

Factors lenders consider

  • Loan repayment history
  • General savings history
  • Stability (e.g. years in profession)
  • Credit bureau history e.g. Dunn & Bradstreet, Veda and Experian

Your loan application needs to answer these questions

  • Have you repaid your debts on time?
  • Do you have a good history of saving?
  • Do you have stable income/cash-flow/employment?
  • Do you have a history of defaults, writs, judgements or bankruptcy?

Additional Information you can provide to answer these questions

  • Copies of all compliance related payments such as GST and tax returns
  • Copies of bank statements for investments and savings
  • Historical financial information
  • Credit Bureau report

Collateral (‘Security’)

The borrower’s ‘security’ for the proposed loan.

Factors lenders consider

  • Type of security (property/land/vehicle/etc.)
  • Value and marketability of the security
  • Security age, location and attributes

Your loan application needs to answer these questions

  • Do you have sufficient ‘security’ for the loan?
  • Is the security for the loan acceptable to the lender?

Additional Information you can provide to answer these questions

  • Detailed security register providing purchase date, current valuation, photos if relevant, any other relevant information.

Capacity

The borrower’s ability to repay.

Factors lenders consider

  • Income
  • Debt obligations
  • Living expenses
  • Dependents

Your loan application needs to answer these questions

  • How much do you earn and is this sufficient to meet your repayments?
  • How stable are your earnings - will you continue to be able to ‘service’ your debts?
  • What are your plans should things change?

Additional Information you can provide to answer these questions

  • Budgeted Profit and Loss statement
  • Cash flow forecast
  • Risk management strategies
  • Marketing strategies

Capital

The borrower’s financial position.

Factors lenders consider

  • Amount of asset and liabilities
  • Type / liquidity of assets
  • Type / nature of liabilities

Your loan application needs to answer these questions

  • Are you in a strong enough financial position?
  • Could you sell (liquidate) your assets if you needed to reduce debts and how long would it take?

Additional Information you can provide to answer these questions

  • Historical balance sheets for past 3 years
  • Budgeted balance sheets for the next 3 years

Conditions

The lenders ‘terms’ of providing the loan.

Factors lenders consider

  • Repayment schedule
  • Pricing (interest rate and fees)
  • Conditions precedent (something that must happen before funding)
  • Conditions subsequent (during the loan)

Your loan application needs to answer these questions

  • Do you understand what you may need to give your financier?
  • Will you be able to meet all of the ‘conditions’ of the loan?
  • Do you understand what may happen if you ‘breach’ a term of the loan?

Additional Information you can provide to answer these questions

  • Summary of loan terms and conditions in loan application
  • Budgeted balance sheets for the next 3 years

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