Loan Industry | Complete Loan Processing Guide & Terminologies

Introduction

A loan is some amount of money, any sort of property, or any other material goods given to a party in exchange for future repayment of the loan’s principal value amount with interest in a fixed tenure and equated monthly installments, i.e., EMIs. A loan can be borrowed by a person, a bank, or any financial institution with the agreement/bond, or a contract to pay back the principal and interest within the given period of time.

There are several types of Loans based on the needs of an individual – 

• • • Unsecured Loans
    • Secured Loans
    • Vehicle Loans
    • Home Loans
    • Education Loans
    • Business Loans
    • Property Loans

What is the process of Loan Processing?

A loan is processed after a lot of backend work to process and manage the loans. To have a background verification properly is the most crucial step before sanctioning a loan. The loan processing typically involves various key steps to ensure the borrower is eligible for the loan and can repay the loan in the given time, along with the interest.

Steps involved in Loan Sanctioning –

• Research and Preparation
   1. Determine the type of Loan & its Purpose
  Identify the need for a loan (like Home, Vehicle, Business, or Personal) and the type of loan that best suits your need.
  2. Eligibility Check
  Check the criteria to be eligible for the loan, such as credit score, source of income, gross & net income, and any existing debts.
  3. Assessment of Financial Health
  Calculation of debt-to-income ratio (DTI) and check if you can handle the monthly instalments.
  4. Gather Required Documents
  Typical documents include:
  – Proof of identity (PAN, passport, etc.)
  – Proof of income (Form 16, bank statements)
  – Tax returns (ITR)
  – Credit history (CIBIL Score)

• Apply for a Loan
  1. Choose a Loan Provider after doing research
  Compare interest rates, terms, fees, and customer reviews of different banks, credit unions, or online lending entities.
  2. Submit the Application
  Complete the loan application form. Provide correct information about your income, employment, and finances.

• Documentation and Verification
  1. Submit Supporting Documents
  – Upload or hand over necessary documentation as requested by the sanctioning authority.
  – Get your credit checked
  – The loan provider reviews your credit report to assess your repayment history and whether you are fit for lending.
  Verification
  The loan provider verifies your employment, income, and other details provided in the application.

• Loan Underwriting
  1. Applicant Risk Assessment
  The underwriting team evaluates the loan’s risk by analyzing the Applicant’s financial health and the value of collateral (in case of collateral).
  2. Approval Decision
  Based on their analysis, the lender approves or denies the loan.

• Loan Offer and Acceptance
  1. Review Loan Offer
  If the loan gets approved, the lender sends you a loan agreement with all the terms and conditions for the loan, along with repayment tenure details and applicable EMIs. It generally contains:
  – Loan amount
  – KFS (Key Fact Statement)
  – Interest rate (fixed or variable)
  – Repayment term
  – Monthly payment
  – Fees and penalties
  – Negotiate T&Cs (Optional)
  – Accept the Loan
  – Sign the loan agreement to accept and formalize the process.

• Disbursement
  1. Funds sanctioning and tranche or complete disbursal
  The lender transfers the funds to your account as a tranche or completely, as discussed or mentioned in the contract.

• Repayment
  1. Plan the Repayment as Part Payment or complete payment of the due amount
  2. Start making payments as per the equated monthly instalments mentioned in the loan agreement.
  3. Set Up Automatic Payments like ACH or Autopay
  Keep track of payments and remaining balance with Principal and Interest details

• Loan Closure
  1. Completely Pay Off the Loan
  2. Once all payments are done, a statement of closure can be requested.
  3. Obtain a No-Dues Certificate from the lender
  4. Ensure the lender issues a document stating the loan is fully repaid that can be kept as evidence.
  Release of Collateral (if applicable)
  If the loan was secured, ensure the collateral (e.g., property title, car) is released and returned to you without making any modifications in it.

Conclusion

This was all about the basic steps taken to grant a loan and the process being followed at any institutional level. In our next blog, we will be discussing the next steps on a deep level, like FI, Moratorium, mortgage, LTV, DTI, APR etc.

Do share your thoughts and comments here to get your queries addressed. Thanks for your time!