Unit 4: Sources And Uses of Short-term And Long-term Funds

4.2. Loan Requirements

Questions to Ponder
1. For a first-time borrower, do you think that the process is tedious? Why or why not?
Answers may vary depending on the specific context of the student. A sample answer
could be: No, the requirements are reasonable and straightforward, and the process
seems efficient. It uses technology while providing the option of doing business over the
counter.
2. What could be the reason/s why financial institutions set these requirements for a
simple loan application?
Answers may vary. Financial institutions need to verify a borrower's identity and assess
his or her ability to settle the financial obligation to be incurred. These are important for
financial institutions to avoid the risk of defaults in payments.
3. If other types of loans, like a car loan or business loan, are applied for, do you think
the online loan application is possible? Explain your answer.
Answers may vary. A sample answer could be: Yes, banks nowadays have used online
means to process loan applications. During the pandemic, these financial institutions
needed to provide alternative ways to facilitate transactions through the internet.

Check Your Progress

1. What is the importance of an individual's character in obtaining a loan?
Answers may vary. An individual's character as a borrower is demonstrated by his or her
credit history. It shows whether the borrower had been responsible for settling his or her
previous obligations based on agreed payment terms and schedule. Exhibiting that you are
a good payor increases your chances of obtaining a loan since the bank will consider the
loan granted to you as low risk.
2. Why do firms need to look into the borrower's other existing debts?
Banks need to look into the borrower's existing debts and obligations to determine the
liquidity and solvency of the borrower, thereby assessing the risks in granting a loan
application. If a borrower has other outstanding debts, his or her current and noncurrent
assets may not be enough to cover the additional liability.
3. What are the advantages and disadvantages of acquiring a loan from a bank?
If your personal or business plans require large funds, it is best to acquire a loan from a
bank. However, banks generally have higher interest rates, require more documentation,

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 Unit 4: Sources And Uses of Short-term And Long-term Funds
and implement stricter application procedures than nonbank institutions.
4. Which is cheaper to obtain a loan from, a bank or a nonbank institution? Why?
It is cheaper to obtain a loan from a nonbank institution. The interest rates are generally
lower. However, the loan amounts offered are usually less than those offered by bank
institutions.

Try This
True or False. Write true if the statement is correct. Otherwise, write false.

False 1. Financial institutions do not have to know why you are obtaining a loan.

True 2. Personal data information such as your address and citizenship are
needed in loan applications.

True 3. Borrowers may obtain personal loans from commercial banks.

False 4. Rural banks usually grant loans to everyone, even those not in the banks’
serviceable areas.

False 5. Cooperative banks and rural banks are the same in terms of
proprietorship.

True 6. Insurance firms consider a client’s policy as collateral for loans.

False 7. Venture capitalists require the exact basic documentary requirements

required by commercial banks.

True 8. Commercial banks generally require more documentary requirements

compared to nonbank institutions.

True 9. Rural banks and cooperatives impose additional qualifications on

applicants depending on the nature and purpose of the loan.

False 10. GSIS issues loans to government employees regardless of their length of
service.

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 Unit 4: Sources And Uses of Short-term And Long-term Funds
Practice Your Skills
Assume the scenarios below and identify the type of bank institution and requirements
appropriate for the borrower’s needs.

1. Sheldon is a small business owner. His coffee shop had been generating a lot of
revenue since its operations last year. However, he plans to add more products to his
menu and construct a second story to accommodate more customers. Which type of
loan may he obtain, and what are the requirements?
Answers may vary. Sheldon may apply for The SME (Small-Medium Enterprise) Loan at a
commercial bank. The Basic Loan Requirements in commercial banks are the following:
● Business is in profitable operation for at least a number of consecutive years,
depending on the bank's policy.
● Minimum annual gross sales (the amount depends on the bank's policy)
● Business is within the bank's serviceable area.
2. Leonard, a teacher for 20 years in a government-run educational institution, plans to
complete his postgraduate studies. Which type of loan may he obtain, and what are
the requirements?
Answers may vary. As a government employee, Leonard may apply for an educational
loan through GSIS. He only needs to prove that he is in active service and has been paying
contributions for the past 20 years.
3. Lena, a restaurant manager, just got married. She plans to obtain a loan to purchase
their family home. Which type of loan may she obtain, and what are the
requirements?
Lena may apply for a housing loan through PAG IBIG or a commercial bank. The HDMF
requires applicants to submit basic loan requirements, proof of premium contributions,
active employment status, and certification from the employer.
4. Howard, an employee at the Department of Foreign Affairs, is interested in applying
for a loan from the Development Bank of the Philippines. What requirements should
he prepare?
Howard is applying for a loan from a government bank institution. He would need to
prepare basic loan requirements and other documentary requirements depending on the
type of loan he intends to apply for.

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 Unit 4: Sources And Uses of Short-term And Long-term Funds
5. Penny, tired of using the daily public transportation, plans to purchase her car
through a commercial bank loan. What are the standard requirements that she needs
to secure?
Penny must secure a driver's license, car dealer's information, a downpayment (a
percentage of the total cost of the vehicle and depends on the terms of the loan bank's
policy) with the purchase receipt or payment document provided by the sales agent/car
dealer, car certificate of title, proof of insurance, registration certificate released by land
transportation organization (LTO), deed of sale, a car park in your house or the location
where the car will stay, not on the road (this is a policy of each local government unit).

Challenge Yourself
Answer the following questions.
1. Why is it important to know the different types of loans and their requirements?
Provide a concrete example that illustrates your answer.
Answers may vary. Knowing the different loan requirements is crucial to identifying the
appropriate loans for various individuals and their specific needs. For example, proprietors
of startup microbusinesses with no credit history will have difficulty acquiring a business
loan from commercial banks. These commercial banks require documentary evidence of
proof of income, credit history, collateral, etc. It is best to apply for loans from nonbank
institutions or cooperatives that require fewer requirements but may only approve a small
loan.
2. Is it easier to apply for loans in nonbank institutions? Why or why not? Provide a
concrete example that illustrates your answer.
Answers may vary. It is not always easier to apply for loans from nonbank institutions.
The ease of obtaining a loan from these institutions still depends on the type of loan and
the specific context of the applicant. For example, it would be fairly easy for employees
who had been long-time members and contributors in nonbank financial institutions to
obtain a loan from GSIS or SSS. However, it may not be the same for new members who
still need to fulfill the minimum number of years of contributions required.
3. Why must borrowers comply with the different requirements of nonbank bank
institutions?
Answers may vary. Borrowers have no choice but to comply with the requirements set
forth by the financial institution to have their loan applications approved. These
requirements are necessary to validate the borrower's identity and determine his/her

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 Unit 4: Sources And Uses of Short-term And Long-term Funds
capacity to pay the financial obligation. In a way, these requirements also benefit the
borrower. The process tells him or her whether a specific kind of loan is ideal for his or her
financial situation and unique context.

4.2. Loan Requirements 5