Borrower Loan Application Case Study

Meet Mr. Roberts

Mr. Roberts, a fictional character for this personal financing case study, is applying for a loan when the loan officer (lender) asks him, “What loans and credit cards do you currently have?”

Mr. Roberts replies, “Here is a recent copy of my Credit Bureau report I received last week. Can you tell from this what you need?”

The lender, relieved that Mr. Roberts came prepared with a recent credit report, will key into the application all the trade lines on that report. They will still pull their own credit report on Mr. Roberts to cross check the information, likely not asking him that same question again. Mr. Roberts didn’t outline with the lender all of his liabilities one by one. He answered the question with a question, which the lender accepted as an answer. He didn’t get into any conversations about why he has a private loan with his mother. The lender receives the necessary information they required to process the application, confirmed all liabilities against the credit Bureau report and is now closer to meeting sales targets and finishing this appointment with Mr. Roberts.

Mr. Roberts had also lent $30,000 to his sister, and has not shown that loan has an asset nor as a monthly income, as it can’t be proven. On the credit report Mr. Roberts provided there were no overdrafts on any of his checking or savings accounts, no outstanding mortgages or pending divorce discussions, no cable or telephone repayment histories, or the fact that he owes his mother $20,000. Nobody can tell that the loan her mother gave her was for the new car she drives as your credit Bureau would show if she had a loan with another bank for that new car, or if it were a lease through a dealer. Pvt. money (loan or investment) isn’t tracked and can’t be disputed without evidence. In essence, private loans are invisible. He was asked if she owned or rented the property put down as his mailing address. Mr. Roberts, not trying to elude the lender about his mortgage with the bank down the street, willingly shared he does in fact own the property and has a small mortgage against it even though his credit Bureau report does not show a mortgage on it.

Keep in mind there will be a question somewhere throughout the application process that he will need to answer in writing (sign to) confirming that he has disclosed all the facts and has not knowingly withheld pertinent information that could impact the bank’s decision. Mr. Roberts feels the interpretation of the word facts is open for discussion. He perceives only legal items as facts, not the repayment of family loans.

Mr. Roberts still has a commitment to repay his mother each month though the terms frequently change, even to the point of skipping numerous payments. This type of commitment is difficult to explain, even that his mother has agreed that when he doesn’t have ready cash on hand that he doesn’t need to pay that month. Mr. Roberts did not sign a note with his mother promising to repay her. There is little legal standing about this family loan, other than a mutual understanding. If it ever became complicated, his mother would have a difficult time trying to sue or prove her son owes her money. Mr. Roberts actually repays alone to his mother from the monthly payment his sister gives him on her loan, not using his own cash to pay back his mother.

A banks loan is very illegal and must be repaid as he signed a loan note committing your promise to repay. It’s easier to ask mom and dad to wait an extra month for that payment, or to reduce the payment amount, then it is to ask a bank to do the same without raising yellow flags. It is a good thing that Mr. Roberts came prepared! The entire process took 20 minutes to complete from the time Mr. Roberts entered the lender’s office to leaving the bank. He will have his answer within 24 hours, and will likely be approved for the loan.

What The Bank Is Really Interested In

When a person walks into a bank branch, and meets with a lender to tell their story of woe, they will receive no money on that reason alone. (I am sure that that really surprises you) Though the story may be very real and life altering, it isn’t enough to get a loan nowadays. All the words and paper can’t deter that it all comes down to how much cash you have each month to service your commitments, and the strength of your credit report. Banks do care about what you want the loan for, but there isn’t a huge emphasis placed on it. It is best to keep your reason for needing the loan as a simple one, like investment reasons, or small home repairs. If you are applying for a loan to refinance or consolidate all your existing debt to minimize your monthly payments you may be declined for that reason alone. Getting a debt consolidation loan is usually done with a trustee.

Refinancing your affairs is viewed as a yellow flag, and may indicate that you’re having credit trouble or cash flow problems that are beyond your ability to fix. Though a refinance loan make sense in a lot of cases, less monthly payments, less interest etc., it makes lenders on easy. It’s unlikely that you will be successful convincing a lender your refinancing situation is not a risk, even though in most cases refinancing or consolidating debt is a good idea. If you continue to apply for a refinance or consolidation loan, you may be forced to sit across the desk of a high risk lender (with the possibility of a high APR loan). These lenders will lend to you, and charge a premium to do it. These types of loans take longer to repay due to more of the monthly payments being spent on interest, rather than reducing the principal. Put aside your just desperation, as you need to review your needs and how much debt you have to refinance before approaching this type of lender. You’re at the end of the road, using a lender of last resort.

An investment loan needs to be very broad by description. It can be used for anything that generates a return on principal. Consolidating debt can be viewed as a wise investment strategy, minimizing interest thereby generating savings on your debt instrument. This can also be positioned as a return on your investment. The investments being the new loan to pay out all the other loans and save money using lower monthly payments. It’s all in the personal interpretation of what exactly the word investment means to you.

Speaking “bank” usually means you’ve clearly presented your current debt commitments, proof of income, and employment stability to a lender that is now able to take that information, key it into an electronic application form and send it to their credit grantor without too much difficulty ascertaining the risk they will take in lending to you. Keep it clear, clean and simple – just like I have mentioned here many times before.

As a final note for this post I want to remind you how important it is to prepare all your questions ahead of time when you want to ask about loan terms, amortizations and rates. This will help to keep you focused during the client interview, and will keep the lender on their toes to offer you choices. Leave space between your questions to add notes that you can review later. If you come across as a smart borrower who is honest and keeping detailed records of the interview you will be impressing the loan officer much more than you could ever imagine. Even if you were just doodling little cartoons on a scrap piece of paper or Notepad, the bank officer will likely assume you are taking notes on amortization, rates, terms, APR, and legalities.

Continued in the Carol’s Borrowing Series Category of Clf.