What are lenders looking for when you are applying for a loan?
Calculate your debt to burden ration before you apply for a loan. (Shutterstock)
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You needed some cash. It may have been for a personal goal, a new car, a home renovation project, a wedding in the family or your child's education. So you researched and compared all the loans available in the UAE on Souqalmal.com and then applied for a loan.
That's your side of the story.
But what is your lender’s perspective on your loan application?
While you eagerly wait for your bank’s sales person to come back to you with the “loan approved” papers, let’s take an in-depth look at all the checks and processes your loan application file could go through behind the scenes at the bank’s end.
Remember, the first thing any lender wants to know before simply handing over it is precious cash to you is — can you and will you repay back all that money?
Souqalmal.com attempts to explain the loan assessment process. Here’s an insight into questions that a bank will seek answers to with regard to your profile:
The Bank Checklist
What does the customer earn?
The main assurance the bank needs is that you have an adequate and stable income that enables you to repay your debts. For this, as a first step, all banks have set minimum income levels for their lending products. They usually start at Dh3,000 to Dh5,000.
A salaried individual might be a more attractive profile to the bank since there is a lower risk of income fluctuation. However, this does not mean that a self-employed individual wouldn’t get a loan. It simply means that a bank will run further inquiries into estimating the self-employed individual’s income — by looking at the financials of his company, the annual turnover, profit and loss reports, etc.
Who is the customer’s employer?
This maybe a criteria that is almost unique to the UAE. Financial institutions rely on your company’s reputation, where if your employer is listed with the bank, procuring a loan becomes easier for you. This is because listed companies are those that have submitted their financial results to the banks. Knowing that your company earns steady profits assures the banks that you would most likely receive your salary on time.
Is the customer in a secure job?
Just working for a listed company may not be enough. If you are a new employee and on a probationary period you pose a higher risk to the bank. Most will approve your loan only if you have held your current job for a minimum period of six months. Do remember that the bank will run a reference check with your employers. Other red flags for the bank are - customers who are completely new to the UAE or those who shift their jobs very frequently.
In case of self-employed individuals, the bank will have a minimum length of business requirement. It is less likely to fund a new business which could suddenly shut shop for not taking off.
Is the customer’s income being transferred to the bank?
Most UAE banks require customers to transfer their salaries or incomes to them. This way monthly loan instalments can be regularly deducted from your account in a timely fashion. It also gives control to the bank to freeze the account if you change or lose your job and cover its risk with your remaining balance and end of service benefits.
How much debt does the customer already have?
If you have accumulated a lot of debt, your loan may not be approved. For this, banks follow the UAE Central Bank regulation which says that the maximum debt-to-burden ratio (DBR) for anyone in the country cannot exceed more than 50 per cent. Simply put, if you earn Dh10,000 a month you cannot be repaying more than Dh5,000 in monthly debt commitments.
Every time you apply for finance, banks will request you to provide information about all the other repayments you are currently making. They will also ask you the credit limit on all your credit cards. And since the recent formation of the UAE’s Al Etihad Credit Bureau, banks can now access all this data directly from the credit reports instead of relying on information provided by you.
You can calculate your own DBR before applying for a loan. Just add all the monthly payments you make on all your loans and combine this with five per cent of all the credit card limits you have. Then divide this sum by your total gross monthly income:
DBR = (personal loan repayment, mortgage repayment, car loan repayment per month + five per cent of total credit card limits) / monthly income.
What is the customer’s reputation with repayment?
If you have a questionable history when it comes to repayment of debts, banks will not find your profile attractive.
They will check your bank statements to ensure that you have not defaulted on paying any Equated Monthly Instalments (EMI) or credit card bills. Also, the Al Etihad Credit Bureau reports give banks access to records of any missed payments or bounced cheques in your past. Remember however, a bank needs your written consent to check your details. It is generally in the loan application form.
You can also easily purchase a copy of your own credit report directly from one of the credit bureau’s customer centres for Dh110.
By Ambareen Musa
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