How Does a Bank Decide to Grant Loans?

The Bank Requires an Application

When a potential borrower expresses interest in a loan, the lending bank requires the borrower to fill out an application, which includes certain requisite information. This information may include the borrower's name (which may be a personal or business name), any stakeholders in the business (for business loans), current address and address history, contact information, income information, and identifying information like social security or taxpayer identification numbers. While some applicants complain that bank loan paperwork is lengthy, all of this information is later used by the bank to determine the borrower's ability to repay, and to figure out the risk that repayment may not occur.

The Bank Runs Automated Checks

Because many banks have complex lending regulations including lengthy mathematical formulas, lenders often use automated software or programs to verify the creditworthiness of the applicant. These analysis systems consider factors such as the ratio of existing debt obligations to verifiable income as well as credit history information obtained from established credit bureaus like Experian or Equifax. After all information is processed, the evaluation system returns an automated recommendation on whether to proceed with the loan.

A Loan Officer Reviews the Application

Even though an automated system makes a recommendation on whether to grant a loan, these systems do not necessarily have the final decision. A human loan officer generally reviews every loan, and almost always reviews large loans like mortgages. The loan officer considers the response from the automated system as well as any intangible credit factors such as the applicant's community standing, non-debt financial obligations (like child support) and any existing business with the bank.