Loan policy

A loan policy is the policy set up around granting and authorizing a loan in a company or bank.

There are few companies, banks, mortgage companies or other lenders that do not have requirements, rules and policies for providing, granting and managing a loan. These requirements, rules and policies are summarized in the company's loan policy.

Often the company's loan and credit policy are one and the same thing - or at least often written in the same policy - and therefore in practice you will often find that these are summarized as "credit and loan policy".

What does a loan policy contain?

A loan policy contains all the requirements, rules and thus policies that apply to granting a loan to a customer. The loan policy is often designed by the lender itself and is a dynamic process that is continuously updated, adjusted and improved according to current conditions, situations or if the lender has encountered cases they want to minimize in the future.

Most loan policies include policies on who can borrow, how much can be borrowed and the like.

It's basically up to the lender to design their loan policy. Generally speaking, the more comprehensive a loan policy is, the more demands are placed on the borrower - theoretically minimizing your risk.

For example, if you are an industry-specific bank or lender - e.g. to a specific customer category - a point in your loan policy could be that loans are only granted to customers in this industry or customer category.

The overriding general requirements in most loan policies are about the borrower's financial circumstances - and thus credit approval. Often you will encounter requirements for the borrower to be credit approved for the loan - including that certain requirements are met, such as the borrower submitting documentation of their income(s), providing access to tax information, etc.

In most loan policies, you will also find requirements for how much you can borrow. If you look at the loan policies of banks and mortgage lenders, there is often a requirement to borrow a maximum of x% of your total income - often a factor of 3-4.

Why have a loan policy?

There are many good reasons to have a lending policy - but the overriding one, of course, is to ensure that the lender does not lend to borrowers who should not have a loan, and to lend to borrowers who are allowed to take out a loan.

Without a loan policy, it is often left up to the individual bank advisor or employee to grant a loan - without a guideline for who, what and how much a loan can be granted for.