Final answer:
The process described is called prequalification, which helps lenders assess how much they are willing to lend a borrower. Reassurances to banks can be provided by sharing income information, undergoing credit checks, using cosigners, or offering collateral. Banks may sell loans in the secondary market.
Step-by-step explanation:
The process whereby a loan officer takes information from a borrower and makes a tentative assessment of how much the lending institution is willing to lend them is known as prequalification. When an individual is looking for a loan, they can reassure a bank about their creditworthiness through various means. The bank will require the individual to fill out forms regarding income sources and will perform a credit check on their past borrowing history.
To further manage the risk associated with imperfect information, the lender may require a cosigner, who legally pledges to repay the loan if the original borrower defaults, or they may require collateral such as property or equipment, which provides the bank with the right to seize and sell it if the loan is not repaid.
In the secondary loan market, banks sometimes sell the loans they have issued to other financial institutions, which then take over collecting the loan payments.