When faced with rejection by a bank, most people react emotionally rather than looking for the business reasons behind the decision.
Banks make their profits from the interest that they charge on loans. Banks, in fact, have to lend money to stay in business. But they have to lend to those who are likely to repay it.
How can we help banks lend us money if we need it?
- Ask for the right product. Banks call the different types of loan that they offer “products”. Showing a familiarity with how banks work will go some way to building confidence in you on the part of the bank. Don’t ask for an overdraft facility if you need the money to buy a car or equipment. Generally speaking, the bank will want to offer you a loan with a term that corresponds with the life of the asset. That’s why you get to pay your car off over 3-4 years and your house over 20 years.
- Many people prefer overdrafts to term loans because there seems to be less hassle involved. Once you have convinced your bank to give you an overdraft, there is very little paperwork involved. With term loans, there are agreements to sign with pages of legal jargon in fine print. What you need to remember as long as you pay off your term loan in terms of the agreement, the bank can’t ask you for the money back before it is due. Banks can ask that an overdraft be repaid within 24 hours if they feel that your risk profile has altered and you are now a bad risk.
- All of us have a “risk profile”. What is it based on? Your credit record. If you have a history of not paying accounts, the bank will establish this during their investigation of your loan application. Such a history will suggest to them that you are unable to manage credit extended to you. First time borrowers have a particular problem as they may not be able to supply trade references for the bank to check. “I always pay cash and have money in my savings account, and now I can’t get alone when I need one, yet old Joe, who has accounts all over town, is able to get more and more credit”. Unless old Joe is digging a hole for himself, it may well be that he is able to manage credit by buying wisely and always budgeting for his repayments. This makes him a valued client.
- Your income. Before you visit the bank, you should have an idea of what the monthly repayment will be for the loan. You should also have compiled a list showing your monthly income and expenditure, including the new loan repayment. This will demonstrate that you can make the necessary payments. Bankers refer to this as being able to ‘service the debt”.
- Your assets. Bankers like to feel that, if you are unable to meet your obligation to them, they will be able to sell something you own in order to get their money back. They call this “taking collateral”. Your assets therefore form an important part of your risk profile.
A good strategy is to establish the relationship before you need a loan. After all, would you lend money to a stranger?