Factors Leading to Bad Loans
The economic condition of a country is greatly affected by the amount of bad loans. For the layman, bad loans refer to those amounts of money that were loaned out by the bank to individuals or ventures but were not paid back. This failure of the bank to get back the loaned amount is a major reason why many banks all over the world are suffering from colossal losses. In this post we are examining some of the factors that lead to bad loans.
It is wrong to assume that bad loans always happen because individuals or establishments are unable to pay back the loan. Such an assumption is erroneous. There are mistakes committed by the bank also that contribute to bad loans. For starters, the most common mistake made by banks is their failure to process the paperwork properly. Often, banks end up loaning more money to a person or a business consortium that they deserve. Take the example of a single person whose monthly income is unstable and irregular. If such a person is allowed heavy loans, the chances of that loaned amount never getting repaid are very high!
In every banking sector the world over, loans are approved against credit scores. These are calculated by considering several factors, including income, prior history of taking loans, regularity of previous payments towards those incurred loans, value of assets, and several other factors. When the credit score hits a particular margin, which differ from one country to another, loans are approved by banks. Sometimes, this credit score is miscalculated, enabling an undeserving person to receive a loan that they may not be able to pay back.
Let us now turn our attention to factors due to which individuals are unable to pay loans, leading to bad loans. The most common reasons are lack of sufficient income or medical catastrophes that wipe off savings and add to already piled up loans. Other than these obvious ones, many individuals go overboard while asking for loans, even going to the extent of filing misleading paperwork to hoodwink banks. One should apply for a loan simply because a bank is willing to give one! Individuals should be prudent and careful about applying for loans, and going ahead with it only when they feel that they can pay back. Addictions like gambling and mismanagement of funds also play a role.
If both parties, loaners and loan takers, are careful, bad loans can be curbed.
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