The loan lifecycle is exactly what it suggests – it consists of all the activities from the actual application for a loan to when it is repaid.
This is includes:
- Pre-qaulification stage
- Application Submission
- Application Processing (Loan Origination)
- Underwriting Stage (Risk Assessment)
- Secondary Markets
- Loan Servicing
To the lender, it embodies due diligence regarding customer background checks, regulatory compliance, and financial procedures. To the borrower, on the other hand, the lending life cycle represents the distance between a successful loan application and a rejected one.
Recognizing the importance it bears to every participant in the lending process, we will closely examine each stage of the loan lifecycle. Let’s start!
What Is a Loan Life Cycle in Banking?
In the real sense of it, loans processing covers all processes, from loan origination to loan transaction management. Thus, a loan is like a living creature. It is conceived during the origination phase when the application is initiated by the borrower and matures through that phase till it is eventually disbursed. This occasions a shift from the loan origination lifecycle to the management phase, or its adulthood. At the end of the management period, the loan is repaid and the transaction is concluded, which marks the end of the lending life cycle.
The Loan Life Cycle Process and Its Stages
Putting the loan life cycle under the microscope, we can delimit it into stages based on the activities that occur between the initiation and termination of the lending process. They include the pre-qualification stage, application submission, application processing, underwriting process, disbursement, secondary markets, and loan servicing.
- Pre-Qualification Stage
This is the first stage of the loan life cycle in banking. It sets the loan origination phase in motion by signifying the borrower’s intentions. It entails the initial inquiry about the lender’s loan services, during which the borrower gets the list of documents and items they would need to have their application considered. This includes items such as a means of identification and bank statement, scrutinized and verified by the lender. From here on, the borrower would get a notification as to whether or not they qualify.
- Application Submission
After getting the go-ahead from the lender after the pre-qualification stage, the borrower proceeds to submit an application formalizing their interest in procuring a loan. The application content may depend on the financial institution. Still, it typically contains information about the borrower and loan package of interest. It may also be a physical submission done on paper or by digital facilities enabled by the service provider.
- Application Processing
After the application is submitted, it is sent to the relevant department for verification. This is often the credit department, which is in charge of scrutinizing each loan application to ensure the information submitted is complete, original, and true. In reality, this stage may come across as a more formal version of the pre-qualification stage. While the pre-qualification stage determines eligibility for a loan, the application processing stage helps update the database of borrowers deemed eligible. Suppose there are any discrepancies or omissions in the information submitted by the borrower. In that case, the credit department reaches out to the customer for clarifications or further submissions.
- Underwriting Stage
The underwriting stage is perhaps the most important stage of the loan origination process. This is where the credit department makes the decision on processed applications. The lender reviews the customer application with respect to the institution’s criteria. Then they decide whether they should proceed with the request or deny it. The criteria could be based on a myriad of metrics. Metrics include one’s credit score, borrower’s employment, and other factors that could affect the integrity of the loan agreement. Very often, applications are viewed based on the borrower’s data, the value of the loan, and the kind of loan in question. Thus, any loan application that falls short of the set criteria may be denied. Any parameters can also change to reduce any potential risk. These changes may include different interest rates, a smaller loan, or collateral requests.
Once an application moves past the underwriting stage, it undergoes final checks to ensure there are no mistakes, after which the application becomes a funding request. This stage ends with the loan’s disbursement in full or tranches, based on the borrower-lender agreement, and concludes the loan origination phase.
- Secondary Markets
Secondary markets are especially common in the mortgage ecosystem. After the loan agreement is set in motion, the contract can be sold to government establishments or private entities in the secondary market. These entities can then hold rights to the loan’s originating interest or profit from it by making them derivative securities. Under certain circumstances, the original lenders may retain some servicing rights despite selling the agreement to the aggregators.
- Loan Servicing
This is the final stage of the loan management phase. When the time for the repayment has lapsed, the loan is completely serviced. In this event, the loan life cycle process has come to an end. Both parties discharge their duties under the loan agreement, terminating the contract.
Does a Business Need a Loan Lifecycle Processing System?
The commercial loan life cycle process can vary across companies, investment banks, and other actors. That said, they all have one thing in common: the process is complex. The good news is that these activities are automated and digitized through loan origination and management software. Such loan lifecycle processing systems have made the loan life cycle in finance much faster and more efficient. They also take the lending and borrowing experience to a new high.
Take Tarya’s end-to-end loan management software, for example! Tarya’s novel loan lifecycle processing system allows any business to set its own financial and risk levels, facilitate loan origination and approval and keep a 360-degree view of the whole financial process.
In the end, it’s not surprising that more and more businesses are branching into new financial services. Such technology can not only empower borrowers and open new revenue streams for lenders, but it can revolutionize the traditional financial landscape we know. Ready to join in?