As a lender, it’s a good idea to help your clients understand their loan options as thoroughly as possible. When a borrower understands their options, they’re able to make more informed and responsible financial decisions. This will reduce the risk you take on by entering into a contract with them. And, in turn, they’ll likely feel satisfied working with a trustworthy lender, and maybe they’ll even become a repeat customer. So, to increase success for both parties, here are a few ways to help your potential borrowers understand their loan options.
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Be Proactive
One thing to keep in mind when working with borrowers, especially new ones, is that they likely won’t understand everything it takes to process a loan. So, as much as you can, do your best to anticipate questions they might have. For example, if they want to buy a house, they may ask whether they should get a 15 or 30-year mortgage or ask about what mortgage points are.
Put yourself in their shoes and ask yourself, “If I wanted to take out my first loan, what would I want to know?” Imagine you’re a good doctor, providing a patient with helpful information about what to expect going forward. You can assuage some of their concerns ahead of time, guiding them to the help they need.
A potential borrower might not know everything that goes into the verification of income process. It’s a relatively straightforward process, but one that requires the proper documentation. Let your potential borrower know you’ll need a pay stub, W2, or another statement to verify their income. Once they provide you with the proper documents, you’ll be able to confirm their ability to make monthly payments, reducing the risk you take on as a lender. Verification of income can help smooth the whole process, making it easier for everyone involved to move forward.
Be Specific About Loan Terms
In a similar vein, it can be helpful for borrowers to walk them through the component parts of their loan options. As a lender, you know that a loan’s options are the loan’s term, type, and interest rate type. Take a moment early into your interactions with a borrower and check if they understand these terms. If they’re unsure of any of these, you can fill in the gaps.
In particular, it’s important to communicate the difference between short and long-term loans. Short-term loans often have higher monthly payments, while the opposite is true for long-term loans. Do your best to communicate this difference to your borrower. Let them know that they’ll have higher monthly payments if they take out a 15-year mortgage instead of a 30-year mortgage, for example.
Also, be sure to clarify whether or not the loan on offer is a balloon loan. A borrower may be enticed by low monthly payments at first, not grasping that they’ll owe much more toward the end of the term. Protect your borrower by dissuading them from taking on too great a loan for them to afford. In turn, you’ll reduce the amount of risk you take on by entering into a contract with them.
Be Specific About Loan Types
Different financial situations require different types of loans. Take mortgages for example. You could offer your borrower a conventional mortgage, and Federal Housing Administration loan (FHA), or help them take advantage of another government-incentivized program.
These different options will affect the total cost of their loan, how much they can borrow, and how much they’ll need for a down payment. So guide your borrower to the loan you believe is best suited for them. For example, they may not realize that they might qualify for a low credit score loan like an FHA. If their credit score is at least 580, they’re eligible to make a 3.5% down payment. Alternatively, if their score is between 500 and 579, they could qualify for an FHA loan with a 10% down payment.
People may have a general sense of their finances, but most don’t truly understand how their finances affect their loan eligibility. So whenever possible, walk your borrower through the different categories, and explain why or why not they may be eligible for a particular type of loan. If their credit score is on the cusp, this information may help them understand why it’s important to raise their score.
Be Specific About Interest Rates
Understanding interest rates is hands-down one of the trickiest loan details for borrowers to understand. This is especially the case when it comes to adjustable interest rates. Adjustable rates often start off low, so they can be more appealing than fixed-rate loans. But, as you know, adjustable rates can increase dramatically over the term of a loan.
For example, a typical government-sponsored enterprise adjustable rate mortgage can increase by as much as 5% over the loan’s lifetime. Depending on the loan’s principal, that increase of just a few percentage points can represent tens of thousands of dollars. And some borrowers just aren’t ready for that level of financial responsibility.
There are some predatory lenders that take advantage of borrowers by looping them into adjustable-rate loans. This can net lenders more money in the short term, but it’s at the cost of damaging their credibility. Helping your borrower into a loan they can understand and afford increases the chance they’ll come back to you for their next loan. Similarly, there’s a higher chance they’ll positively recommend your institution to someone else. And free word-of-mouth marketing is some of the best you can ask for.
Be Helpful
People notice when others go out of their way to help them. By ensuring your borrower understands their loan options, you’ll empower them to make healthy financial decisions. Granted, it may take some time to walk them through various loan options. But a satisfied customer has a higher chance of becoming a repeat customer. And increasing your pool of repeat customers will help grow your business while keeping the risk you take on to a minimum.
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