In the world of banking, giving out loans is one of the main priorities. This how banks make money. Lending money to their customers means getting back the amount with interest. In many cases, giving out large amounts worth $100,000 means getting $150,000 back.
All of this is done by high-interest rates that are asked from their customers. One might ask – why would people agree to something like this? In many cases, there’s no other way to raise such capital and invest it in something special without the help of lending institutions.
When you want to buy a new house, there’s no other way to find such amounts at once. Some family homes are worth millions of dollars, and no one has that kind of money unless they are rich tycoons selling their yachts or airplanes.
A common person might have life savings worth a couple of tens of thousands of dollars, but going six figures is rarely possible. That’s when they turn to banks to provide the rest of the amount needed for some of their big projects. It may be buying something new, renovating, investing in a business, and so on.
When people ask for a loan, banks are usually following the same rules to approve the application. Every forbrukslån or consumer loan must undergo a quick or thorough background check. This is the only way for banks to know if the applicant is eligible for a loan.
Every time someone applies, there are a couple of things that a bank employee must check and make a decision whether this person can be granted a loan or will be rejected. Here are the five crucial principles in the lender-borrower relationship.
1. The client must have a good credit score
To be eligible for a loan, one must have a good credit score. A credit score is the track record or the exposure in borrowings that one person has. For example, if you already have three loans, for a house, a car, and a business loan, and you need to repay $3,000 every month, then your credit score is poor.
If your salary is $4,500, and $3,000 goes for your monthly rates, then the lender assumes you won’t be able to pay them back. Even if you have side jobs, that are not part of your regular income, they won’t allow it as this is not a safe income, and you might not be able to pay the monthly due.
2. The loan must be guaranteed
Giving out loans with big amounts means that the lender must be sure that the borrower will be able to pay back what they owe. It means that a mortgage is needed on the property or some of the assets that the borrower has. This way the bank will have a guarantee that their money is safe.
Even if their client stops paying the monthly rates because of any reason, they will activate the mortgage and sell the assets. The money coming out from the transaction will cover the remaining debt. In many cases, the banks profit tremendously out of these deals, because even if the loan was paid almost in full, missing a few rates at the end will mean activating the mortgage.
3. The cause of spending must be clear in most types of loans
When a person asks for a loan, the employees will need to know why they need this money. This is a standard procedure as the bank must be aware of the location of their money. If a person asks for a car loan, they can’t buy a house with the money. These assets are different.
Different rules apply to these assets. This is why all lenders need to know where their money went. In many cases, the borrower won’t even see the transaction. They will transfer the money to the right place and the client won’t even have contact with these funds.
4. The bank never loses
It’s worth noting that the lender never loses money. No matter the type of loan, the bank will always find a way to secure themselves. If someone thinks that they can trick a bank, they should know that this is not possible. Of course, we’re not talking about illegal activities, here.
All lenders will give you the money if you’re eligible for it but will make you sign deals that will assure their profits. If you’re working, they will get the interest directly from your paycheck. The law is always on their side, as all loans are legally backed. The only catch is that the interest rates that the bank will acquire sooner or later are what the profit means.
5. The consumer has the freedom to switch banks and get better offers
No one is bound to one lender for the rest of their lives. In most loans out there, the client is free to ask for another loan elsewhere and cover the debt in another bank. That gives people the freedom to choose which bank they are going to use as their partner.
This is excellent because it easily breaks the monopoly of having terrible interest rates and conditions. If someone isn’t agreeing with the terms, they can go to another place where they will have better options. In the end, it’s important for everyone to be happy. The consumers get the money for investments, and the banks earn their profits.
These five principles are what you should know before getting a loan. They apply to all clients and are rules that can’t be broken. It’s crucial to know that all lenders follow them and there’s no way to go around them. See more about how the banks do business here.
If you’re asking for a loan, these principles will be part of your deal without a doubt. Think about a solution for your problem, see if you can handle these rules and if everything seems okay, go for the loan.