How your loan applications are checked

In the United States and the European Union, a loan application involves understanding the borrower’s credit score.

In the Philippines, however, there is no unified credit rating system, which creates a credit score for Filipinos. So, in case you’ve tried applying for a loan but were rejected, you might wonder why.

Here are some factors taken into consideration when banks and lending institutions assess your loan applications.

Lenders would never loan money to people who do not have a steady source of income. After all, how would they expect a borrower to pay if they do not have a reliable source of income to help repay their loan? Lenders want to make sure that you not only have an income from one or more sources (e.g. salary, income from your own business, freelancing, etc.), but this income is enough to pay for your loan within a given amount of time while having enough left to support your lifestyle or basic necessities.

For example, let’s say that you are an employee for a private business and make a net income of PHP 71,765 per month.

You want to pay apply for a HOME LOAN for PHP 2.5M

Payable in two years.

Indicative interest at 5.50% fixed for 2 years you will have to pay PHP 110,239 every month.

This is not feasible because it’s way more than you can make in a month, so it would be rejected. But now, let’s say you’ve applied for a loan of PHP 2.5M in 10 years.

You want to apply for a HOME LOAN for PHP 2.5M.

Payable in 10 years.

Indicative interest at 6.75%. Indicative interest means it might change based on prevailing interest rate at the time of loan release.

Fixed pricing at five years, which means the interest rate will be 6.75% in the next 5 years. After five years, the loan will be subject to re-pricing. The interest rate can be lower or higher depending on the market situation.

Gross Family Income is considered instead of Net Income.

This brings down your monthly amortization to PHP 28,706.

The total interest you pay for this loan will be much higher cumulatively, but it is a feasible loan you can pay off with your total income, so it is more likely to be approved.

The bank will also consider approving your loan application if you can pay off the monthly amortization in the specified period, aside from being able to afford their basic necessities and other existing loans/debts.). The bank measures your capacity to pay by evaluating your Debt Burden Ratio (DBR). This is computed as total monthly amortizations (including the new loan for approval) divided by your gross family monthly income. The DBR is used as a tool to help gauge if you have enough cash surplus to afford basic necessities after paying for all of your home requirements.

Back to our example again, a monthly payment of PHP 28,706 is feasible for someone living within their means if they have PHP 71,765 in monthly income. But if you’re earning that amount and living way beyond your means, you might not have enough disposable income to pay off your loan.

Lenders either use the services of an investigator or interview the applicant about their household expenses. Ideally, it would help if the applicant was not the only source of income for the household and other members of the family chip in. That way, it can reflect that the applicant has the means to pay their loan.

Depending on the type of loan you’re applying for, you may be asked to list down your credit card accounts, your credit card provider, and the amount you owe.

This is to help lenders assess how much debt you’re in and how feasible it is that you can still pay them despite your other forms of debt. Going back to our income example, paying PHP 28,706 a month is feasible on a PHP 71,765 monthly income. But adding the cost of living, household expenses, and your credit card debts you have to pay off, a borrower may be unable to pay any new debt because of their existing ones.

Another debt your lenders will look for is for past and present loans you’ve taken out. Past loans that you’ve already finished paying can be an indication that you can fulfill your loans and pay them off.

On the other hand, existing loans that you’re still paying for can be treated similar to existing credit card debt. Lenders will assess your current loans and, added with your everyday expenses, see if you are still able to pay off this new loan despite the other loans you already have. If you have a history of delayed loan payments, this will reduce your chances of getting your loan application approved. But if you have a good history of paying for your existing loans on time, this will give your lender a positive impression that you are capable of paying on schedule.

In case the worst happens and you default on your loans, some types of loans require collateral as a safeguard for the lender’s investment, Thus, they will need a list of your assets that can serve as your collateral should you fail to pay off your loan. These collaterals will then be legally seized by the lender, sold at auction, and then the revenue from that sale will be used to pay off the remaining debt the borrower has.

Depending on the type of loan you’re taking, the collateral can vary. For example, if you don’t have any assets and you are applying for a car loan, the car you buy will serve as collateral. The same goes if you are buying a home. However, some types of loans require assets to be used as collateral to indicate your seriousness on the loan.

Take note that some loans will also need what is called an equity requirement. This is proof to your lender that you are serious about your loan. Your equity is also called your down payment for the sale of the property.

Loans can help many Filipinos achieve their goals by giving a financial boost. But if you find that your application was rejected, these five factors may be the reason behind your inability to get a loan. If you need expert advice, let Junrix e-Services guide you in securing a bank loan -- whether you're buying a home, a car, or you need capital for your business.

Talk to us to learn more about our loan products, customized to address your specific needs.