Nothing can be taken for granted when you're out looking for a loan the first time around.
From lock-in periods to prepayment charges, every bit of information is crucial to ensure that you're on the best footing when it comes to repayment. This also includes an end-to-end understanding of the loan life cycle.
After all, you'll be servicing the loan for the foreseeable future, which could be up to 6 years in the case of a personal loan. Therefore, it only makes financial sense to have a clear idea of what you're getting into.
With that in mind, here's an in-depth guide to loan lifecycles to help you kickstart your borrowing journey.
What is a loan life cycle?
The loan life cycle refers to the series of stages a loan progresses through, starting from your loan application and concluding when you've paid off every last cent.
Breaking the whole process into stages helps you and your lender systematically track the loan, reducing risks and disputes and paving the way for a hiccup-free experience.
The various loan life cycle stages
Broadly speaking, the life cycle stages for a loan fall into two categories - pre-disbursal and post-disbursal.
If all use cases are considered, a standard life cycle of a loan has about seven stages, most occurring during the pre-disbursal phase. This makes it an important part of the loan life cycle, as your pre-disbursal choices dictate your post-disbursal conditions.
Here's a breakdown of all the stages involved in chronological order:
#1 Loan application
This marks the first stage of the pre-disbursal phase, wherein the borrower completes and submits their loan application. The loan life cycle starts with a loan inquiry, followed by the submission of the application form along with the required documents. The paperwork usually involves address proof, income proof, and KYC. Once you file your application, the life cycle moves on to the next stage.
#2 Application processing
Once the application has been submitted, it is sent to the relevant department for review. Since we're talking about loans, it's usually the credit department. Here, the application is reviewed for accuracy and completeness, ensuring that all fields are filled in correctly. If something is missing, the department will return the application or ask you for the information.
Today, lenders employ sophisticated loan life cycle management systems that automatically flag incomplete applications and send them to the borrower for rework. To ensure minimal back-and-forth, review the application thoroughly before hitting 'send.'
#3 Underwriting process
It is perhaps the most important stage in the loan life cycle. The result of loan underwriting directly decides your loan terms. In fact, if it doesn't rule out in your favour, you might not even qualify for the loan. Here, the credit authority runs your application through a series of checks: credit history, credit score, risk scores, DTI, etc.
Based on their scrutiny, your loan application can be accepted, denied, or returned for more information. If it's outright rejected, you can always modify your loan terms, like amount and tenure, and send it back for review.
#4 Loan approval and agreement
Once your creditworthiness has been evaluated and your application is approved, the lender will specify the loan terms, including the amount, tenure, and interest rate. Additionally, you will be made a loan offer along with a sanction letter.
The letter works as a loan agreement, outlining the various loan terms and obligations. It's best to review this carefully, as there's a lot of important information in the fine print, including information about loan default and prepayment penalties. Based on the lender, you might also be asked to set up auto-debit for EMI payments or share post-dated cheques.
#5 Loan disbursement
Finally, after you sign the agreement and the sanction letter, the lender will forward you the agreed-upon loan amount. You'll receive the loan amount through direct bank transfer, cheque, or demand draft. Also, the lender will deduct any applicable administrative charges or processing fees from the loan amount.
Based on the nature of the loan, the lender will disburse the entire loan amount in one go, such as in the case of a personal loan, or dole out the amount in tranches, like in a home or education loan.
This completes the pre-disbursal part of the loan life cycle.
#6 Loan servicing
This marks the beginning of the post-disbursal phase of the loan life cycle process. Once the loan is disbursed, the lender regularly monitors your loan account to ensure timely repayment from your end. This also includes managing EMI payments, sending periodic statements, providing customer support, and addressing your queries throughout the tenure.
Lastly, in the case of some loan products, the lender may also keep track of whether the funds are utilised for the intended purpose or not.
#7 Loan closure
As the name suggests, this is the final stage in the loan life cycle. Once you've made all the payments and your loan tenure has lapsed, your loan is considered completely services. Both you and the lender dispel your obligations under the loan agreement, terminating the contract.
You can also prepay the loan amount before the end of your tenure if you wish to close the loan early and dislodge the obligations. In such a case, make sure you're aware of the prepayment penalties because, in some cases, you might end up paying more than you're saving.
Final thoughts
The world of loans can seem daunting with all its terms and processes.
However, knowing how a loan life cycle in banking works, you're better equipped to navigate your borrowing journey. Whether you're new to the world of loans or a seasoned borrower, this understanding will demystify the behind-the-scenes actions of the lender and give you more control over your loan decisions, ultimately improving the overall borrowing experience.
With Tata Capital, you can seamlessly surf through the loan life cycle with our convenient consumer-durable loans, featuring a simple application process, easy-to-meet eligibility criteria, swift loan disbursements, and a 0% interest rate.
Head over to our website for more information!
09 October 2023
5 mins read
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