Money is an important aspect we need in our lives. There are multiple loan options available for us, including home equity loans and personal loans. While getting a loan looks great, the truth is, the whole process of acquiring one can be demanding, depending on the lender. A loan analysis is an evaluation to determine whether a loan applied for is legitimate. It involves the verification of whether a client is eligible as per the loan guidelines. Each government sets central loan guidelines. However, every lender has a set of rules that may differ from that of another lender. Lenders’ internal guidelines include; eligibility criteria and the type of loans. Not everyone qualifies for a loan. Typically, on applying for a loan, the lender runs a cross-check of a client’s eligibility. There are also different types of loans with different terms and eligibility criteria, including short-term or long-term loans. Short-term loans are to be repaid in a short period, mostly less than one year, and have lesser interest rates attached to them than long-term loans.
In most cases, every loan application stage attracts a fee. Your lender should explain any fees that apply at each loan stage. Some costs are required upfront before the loan application process. Each lender has a different amount of processing fees. The fees apply to running a credit check for the client to verify if they are eligible for a loan.
Information including financial statements, business plans, and tax returns, presented as the basis of applying for a loan, needs to be verified. Verification of these documents is often accompanied by charges known as underwriting charges. Other costs involved include appraisal costs paid to the company hired to verify your asset to be used as collateral. When the loan is approved, the lender takes a given percentage to cover any miscellaneous expenditure. This fee is known as an originating fee. Originating fees may pay for any brokers that reach out to help you take the loan. When a loan is approved, it is split into two parts; principal and interest. The principal is the initial amount applied, while interest is the percentage that the lender takes for the privilege they have given you by offering the loan. It is always important to get your loan from reputable lenders. This will ensure that even the loan charges you’ll be charged are affordable. Use reviews to check the reputability of lenders. Always avoid negatively reviewed sites.
For loan analysis to be successful, the following rules apply;
- Balance sheet
The balance sheet is a statement that shows the current and fixed assets of a business. This information is a requirement in determining whether the business will pay off the loan if granted.
The balance sheet also shows the cash flow of the client’s business. It shows if the company is making profits or losses. For an employee, the latest payslip will apply for the application of a personal loan. The balance sheet and payslip are used to determine the ratio between the client’s income and the loan applied for.
- Profit and loss
The profit and loss statement is vital when making a loan analysis. It depicts how the business will behave in the near future. It shows how the loan may affect the growth of the company, be it positive or negative.
- Business plan
A business plan is a detailed document showing how the business is going to utilize the loan. It also shows the progress the business has had so far and its current status. With a robust analysis of the business plan, the lender decides on whether the client qualifies for the loan or not. There are also determinants on how much interest a person will pay on a loan. They are as follows;
- Credit score
A lender considers your credit score before processing your loan. A higher credit score will give you the privilege to get a lower interest rate. Your financial history is also a plus to reasonable interest rates.
- Secured loan
A loan with valuable collateral will attract lower interest than unsecured loans. The lender in a secured loan has something they can take if you default payment.
- Loan period
A short-term loan will have a lower interest rate compared to a long-term period.
- The size of the loan
How much you borrow will determine the interest charged. A bigger loan will have a considerable interest rate attached compared to a small loan.
- Reason for borrowing
Depending on your borrowing reason, your interest rate will vary. If you are borrowing to finance a business that is already in good standing, then this will help you have better loan terms.
In conclusion, with this article, the reader is equipped on how to go about a loan analysis and how they can be guaranteed to have good loan terms.