Stages of Loan Life Cycle

Hey guys, how are you doing? Remember the last time we talked about Consumer Lending. Today, we would be taking a look at loan life cycle.  Loan life cycle is the process involved in taking a loan e.g. a mortgage loan, auto loan etc. The first stage in the loan life cycle is the application stage. A loan life cycle officially begins when an individual or business submits his loan application to the bank or financial institution for approval.  For example if you want to get a mortgage loan, it is most likely you have identified the home for purchase, and researched the chosen mortgage lending institution to provide the loan. All these aside, the Loan life cycle actually starts when you submit the loan application to the chosen lending institution.

After submitting the loan application, the lender reviews the application by preparing a credit worthiness report which is a valuation that determines if the borrower is liable to default on his debt.  The credit worthiness report takes cognizance of factors such as credit history, repayment history, and credit score. After preparing the credit worthiness report, the lender deliberates internally on if to extend the loan facility.

If the lender deems the applicant fit for the loan, then the application progresses to the next stage which is Loan closing stage. Here the lender on the back of reviewing the application and approving it secures the necessary funding for the loan. Like in other corporate loans, closing of a loan incurs some additional out of pocket expenses like application fees, commitment fees, attorney fees and so on.

Once the debt closes, the funds are disbursed to the borrower and the loan automatically becomes a legal responsibility on the part of the applicant / borrower. After the closing stage comes the post – closing stage. Post-Closing stage being a part of the loan life cycle is dependent on the type of lender. If the loan is of a significant amount, some lenders may opt to selling part of the loan or sometimes all of it to other financial institutions in order to reduce their exposure to the borrower.  The borrower is not concerned with the post-closing stage, he only needs to ensure repayment of principal and interest as specified in the loan agreement.

The repayment stage is the last stage of the loan life cycle, it depends on factors such as the principal amount, interest rate and tenor of the loan. It may range from 3 years to 5years or 7 years in tenor. The principal and interest are factored into determining monthly or quarterly payments towards repayment of the entire facility.  The repayment stage is the most important part of the loan life cycle as the borrower must fulfil his obligation of repaying both the principal amount and the interest. If the borrower fails to do so, the asset or collateral may be repossessed base on agreements specified in the contract. Once the repayment is made in full, the loan is deemed completed and the borrower becomes free of any obligation to the lender except he takes up another loan.

Recommended Readings

National Consumer Law Cente., Guide to surviving debt