Sometimes we need financial assistance to push through with our business idea, education, medical emergencies, or any other personal project or goals that require a huge amount of money for its realization. Basically, it is for this reason that banks and other money lending institutions exist.
Applying for a loan from any lending institution requires the applicant to first fill out a form. Along with this form, the applicant can attach a loan application letter that provides more details on what he/she intends to do with the money and an overview of how the loan will be paid.
As a loan applicant, you need to learn how to write the loan request letter in a polite and convincing tone to appeal to your lender for your loan to be granted successfully.
What is a Loan Application Letter?
A Loan application letter is a document that informs the financial lending institution of the amount of money you are asking for, a clear outline of what you intend to do with the money, and convinces the bank why you are a good investment risk. Because it is a request, a loan application letter should be written in a polite tone, short and to the point.
The Loan Application Process
Based on the financial institution you choose, the process and time it takes for you to receive funding may vary. However, the typical loan application process may take on the following critical stages:
Pre-qualification stage
Prior to the loan contract, the potential borrower receives a list of items that they need to submit to the lender for them to get a loan. This may include Identification proof, credit score, current employment information, bank statements as well as previous loan statements.
Immediately this information is submitted, the lender reviews the documents and makes a pre-approval- meaning the borrower can move on to the next phase of the loan application process.
Loan application
In the second phase of the loan origination process, the borrower fills-in the loan application form either electronically- through mobile apps, websites, or paper-based. The data collected is then tailored to specific loan products.
The aspects that are included in the loan application form include the following;
The payment method- if it will be personal, through a check, or via online banking.
The payment frequency- There are several payment frequency methods, for example, Monthly installments, annually, or if the loan will be paid once.
The amount of interest accumulated on the loaned amount. This is the amount of money charged by the lender to the borrower on top of the amount which he/she has loaned.
The assets in the form of properties of the borrower will serve as collateral damage/guarantees in case the borrower defaults loan repayment or is unable to make his payments as per the agreed time.
Application processing
Once the application is received by the credit department, it is reviewed for accuracy, genuineness, and completeness. Lenders then use Loan Originating Systems to determine an applicant’s creditworthiness.
Underwriting process
This process only begins after an application is totally completed. In this stage, the lender checks the application in consideration of various accounts, such as an applicant’s credit score, risk scores, and other industry-based criteria. Today, this process is fully automated using Rule Engines and API integrations with credit scoring engines.
Credit Decision
Based on the results from the underwriting phase, the lender makes a credit decision. The loan is either approved, denied, or sent back to the originator for additional information. If the criteria used do not match with what is set in the engine system, there is an automatic change in the loan parameters, for instance, reduced loan amount or a different interest rate on the loaned amount.
Quality Check
Quality check of the loan application process is very critical since lending is highly regulated. The loan application is then sent to the Quality Control Team to analyze critical variables of the loan against internal and external regulations on loans. This is often the last step of the application process before funding is approved.
Loan funding
Once the loan documents are signed by both the borrower and the lender, funds are released shortly after. Nevertheless, business loans, loans on properties, and second mortgage loans may comparatively take more time to be approved due to legal and compliance reasons.
Essential Elements of a Loan Application Letter
Now that you have already understood the complex loan application process, it is important that you know the critical points to include in your loan request letter to convince your lender to give you a business loan.
Here is how to effectively write a loan application letter:
Header and greetings
The first and most important element of your business or personal loan application letter should be a header and an appropriate greeting.
In your header, include the following details:
- Your name
- Your business names
- The physical address of your business
- Business telephone and cell phone numbers
- Lender’s contact details
- Lender’s or Loan Agent’s Name and Title
- A subject line stating the loan amount you are requesting for.
Once you have written your header, include a friendly but professional greeting to start off your loan application letter in a cordial tone.
Business Loan Request Summary
The body of your business or personal loan request letter should start with a brief summary of your loan request amount, why you need the loan, your basic business information, and why you are an ideal risk investment for the lender. This section should be brief and concise. Only include the relevant information to capture your loan agent’s interest and keep them reading the body of your loan application letter.
Basic Details about your Business
Ideally, this is the third paragraph of your loan application letter. Use a few short and concise sentences to give a clear outline of your business.
Be sure to include the details below:
- The legal name of your business and any DBA that your business uses
- Your business structure- if it is a corporation- partnership, individually owned, etc.
- A summary of what your business does.
- How long your business has been operational
- Total number of employees
- A brief description of your current annual revenue
Once you have provided your basic business information, it is time to write the meat of your business loan request letter- clearly explaining why you need the business loan and how you intend to recuperate the investment.
The purpose of the business loan
In the fourth paragraph of your loan application letter, explain succinctly how you will use the business loan. Additionally, tell the lender why your intended use of the business loan will be a wise business investment.
While detailing this section, be as specific as possible and demonstrate to the lender that you have carefully considered the kind of revenue generation this new debt will accomplish for your business. for instance, don’t just say that you intend to use the loan for working capital. Rather, say that you plan to increase your inventory by 45% or that you need to increase your Human Resources to 4 to generate more income by 6%.
In the same paragraph, inform the lender exactly how the loaned amount will help generate more profits necessary to cover repayment plus the interest accumulated on loan.
Proof that you’ll be able to fully repay the loan
In this section, you need to demonstrate to the lender that you can pay back the loaned amount together with interest as per the agreed repayment period. You will want to use any figures from your latest income statements or balance sheets to prove your business is financially healthy and that it is a low-risk investment decision for your lender. In case you have other existing debts, be sure to mention them and include a business debt schedule if possible. If your business is profitable, highlight that in your letter since it something that most lenders pretty much look for in successful loan applicants.
In addition to that, consider including specific cash flow projections to demonstrate to your lender how you plan to fit repayment of the loaned amount plus interest into your budget.
Sample: Loan Application Letter
Sample 1: Business Loan Application Letter
Samira Mitchell,
Mitchell Face Masks Limited,
4680 Forest Road
939, New York.
January 17, 2021
Mr. Wesley Kingston
Guarantor Trust Bank
769 00100
679, New York State
Ref: Loan Request for $10,000
Exactly two years ago, I started my small face mask vending business in our local market. Over the last two years, my business has picked up really well to an extent where I need to expand to a bigger face mask vending company.
It is for this reason that I am writing this letter. I am confident that there is a great market niche for face masks, especially due to the current worldwide Novel Covid-19 Pandemic. Thus far, I have had many repeat customers, new customer links through referrals, and my client base has grown rapidly. Generally, there is an increase in demand for my products; therefore, I am requesting for a loan amounting to $10,000 to be able to supply more and satisfy all my clients.
This money, along with the amount that I have saved up from my profits, will enable me to lease a large, modern storefront and to import supplies that will help me launch my business plan.
I have attached my business plan, my latest business balance sheets, current business schedules, as well as my credit history statements for your perusal and review. If you have any questions or need any further clarifications, please contact me directly on (111) 345 679 or email me at Mitchel.facemasksltd.co.ke. Thank you for your consideration.
Sincerely,
Samira Mitchel.
Sample 2: Personal Loan Application Letter
Dear Michael,
It is common for everyone to face difficult situations and bitter realities in life. I am currently facing a situation where everything seems bleak, and there seems to be no way out of this difficult situation. I am in debt, and I need to pay at least 30% of my house’s mortgage will be taken over by the bank, and I am currently ailing and weak, I’ll not be able to survive such a nervewrecking situation.
The only way I can avoid such a fate is by paying the full amount that is needed by the bank. I can be able to do so if I am allowed to take out a loan from the office, which is a privilege that the company has granted to all the employees. I would be thankful if the company allows me to borrow the money against my monthly pay.
Yours,
Mr Brandon Brown
Do’s and Don’ts of Writing a Loan Request Letter
A loan application letter may increase or break your chances of receiving funding from any lending institution. This is because it is the first thing that lenders look for in the underwriting process when you submit an application. That said, you must know the dos and don’ts of writing a winning loan request letter to help you receive the funding that you really need.
Do’s
- Check your personal and business credit scores before sending a loan request letter and take the necessary steps to improve them.
- Have all your financial statements ready, including cash flow statements, business balance sheets, P$L statements, etc
- Make sure to submit all your relevant credentials along with your loan application request letter.
- Always provide the correct and factual information to avoid fraudulent consequences.
Don’ts
- Don’t make your letter too long and unnecessarily wordy
- Don’t use an informal format while writing the loan application letter. Instead, follow the proper rules on writing formal letters
- Don’t include any false information in your loan request letter- be it your business’s current financial health, assets, and liabilities that may be used as collateral damage in case you default payment or why you need the money.
Things to Remember When Writing a Loan Application Letter
Generally, you should always consider the following essential tips if you want to write a winning loan application letter:
- The loan application letter is a formal document. Therefore, observe the proper rules of writing a formal letter.
- Clearly state your intent to borrow a given amount of money
- Provide a vivid but brief description of why you need the money. Your explanation should be concise, genuine, and transparent. While at it, explain how you plan to use the loaned amount and be very sincere about it.
- Explain why your business is a low-risk investment decision for the lender.
- Enumerate your assets and liabilities
- Include the time, date, manner, and method that you will use to make your payment.
Free Loan Application Letter Templates
Are you looking to get some financing for your business or personal emergency? Download our free, well-crafted Loan application letter templates to help you customize your loan request letter. Our Templates includes all the critical elements of a winning loan request letter that will successfully help convince your lender to grant you the funding you need. Download our templates today to help you get started!
FAQs
Acquiring a loan is sometimes a necessity in one’s business or personal life. Nonetheless, it is not always easy to get a loan as lenders are wary of granting loans due to loan repayment defaults and fraudulent borrowers. This article has provided you with great insight on loan application letters, the loan application process, essential tips for writing a winning loan application letter, and the dos and don’ts of writing a convincing loan request letter. If you keep these things in mind every time you are thinking of applying for a loan, you are sure to get the funds you need to ensure the smooth running of your business and sort any personal emergency that may come your way.