Whether you are borrowing for business or personal reasons, sooner or later, you'll be faced with the need to renew a loan. While it's more common in business lending, in which most loans have shorter maturities than those for consumers, the prudent personal borrower will prepare and thus avoid a crisis. If your loan has a balance left at its maturity date, the bank has the option to require full payoff. In consumer lending, the most common loans needing periodic renewal are home equity lines of credit and mortgages that mature before the balance is paid in full, sometimes called balloon loans.
In the eyes of the bank, a loan needing renewal is the same as a new loan. The bank reviews your current financial information without regard to your credit strength at the original date. The financial review is usually the most time-consuming part of the renewal process. For this reason, a wise borrower will begin preparing a few months in advance of the maturity date. Approach your bank, if you don't hear from it first, and ask what documentation you can submit to make it easier for the underwriters. They will want to see that your income can still support your payment obligations, and that you have sufficient assets to serve as an emergency payment source.
The bank will assess your updated credit report and score. If your credit score has fallen below the organization's minimum, usually in the low-600 range, the lender may decline the loan renewal. Any derogatory items -- such as liens, a bankruptcy filing, medical payment judgments, or delinquencies -- will affect the loan decision. Your payment history on other loans will be a key consideration as well.
The maturity date on the previous loan documents creates the need for renewal. So you will have to sign a new promissory note and, depending on the collateral, new documents for real estate deeds, vehicle title assignments or other paperwork, depending on the property securing the loan. If the loan is unsecured, meaning there is no collateral, new documentation will be minimal. In any case, documents for a loan renewal will be much less than with the original loan. In some cases, the bank may be able to make the renewal with a single modification document, which restates the original loan terms or new terms.
If the loan is secured, the bank will want to verify the collateral status. The lender will want to see that it is still in acceptable and usable condition. If the security is real estate, most likely, the bank will require a new appraisal. If the collateral value has fallen since the original loan date, you may have to pledge additional items of value or pay down the loan balance sufficient to meet new requirements. The loan balance must stay at or below the bank's maximum allowed loan-to-value ratio. This ratio is calculated by dividing the loan balance by the security value. For example, a $75,000 loan secured by a $100,000 house has a 75 percent loan-to-value ratio.
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