Getting access to loan no doubt is major challenge to many individual and corporate borrowers. And because of the paucity of data on people, lenders are skeptical about releasing money to people they do not have good information on or about their history. If you are therefore going for borrowing, it is very important that you understand what the lender would be looking out for in granting your application for loan.
Finance experts say the five ‘Cs’ of Credit including Character, Capacity, Collateral, Capital and Conditions and critical information that lenders look out for to make their judgement about your qualification for the loan and amount qualified for.
Character, is the most important of the C’s. A borrower of good character will make every effort to fulfil all obligations as they fall due. Creditors will take into account your current salary, credit history, and current debt.
The track record you have established while managing credit and making payments over time and living within your means will be important. Signs of stability such as how long you have lived at your present address, whether you own or rent your home and the length of your present employment are also important considerations.
From your credit history, personal background, and borrowing behaviour, a lender may decide whether you possess the integrity, honesty and reliability to repay your debts.
Capacity refers to your ability to repay a loan and how much debt you can comfortably handle. Lenders need to be able to determine whether you can afford to pay off your loan.
The lender will look to see if you have been working consistently in a job that is likely to provide enough income to support your borrowing. Past income and employment history are good indicators of your ability to repay. Income streams are analysed along with any other obligations that could interfere with repayment.
Lenders use the debt-to-income ratio to measure how likely you are to repay the loan. They want to know what your monthly income is and any supplementary income from bonuses, dividends or rental income.
The debt-to-income ratio is calculated by summing up all your existing monthly debt such as your rent or mortgage payments, car loan payments, or credit card payments, including the monthly payment for the item you are trying to finance. This total number is then divided by your income. Most banks would be uncomfortable if more than 35 percent to 40 percent of your income is spent on debt servicing.
Most lenders have stipulated minimum requirements for loan applications. The more you earn in a year, the more qualified you are likely to be. But even if you are a high-income earner, if your debts are equally large, lenders may hesitate to lend you more money.
A loan may be secured or unsecured. When a loan is secured you must pledge something you own as collateral. This will include your bank accounts, investments such as stocks, mutual funds, bonds, property, and other assets.
Capital represents the savings, investments, and other assets that can be liquidated if necessary to help you to repay the loan. It is important to have some reserve to back up the loan should there be an interruption of funds you may need to make a down payment or for other costs.
While your salary or other income are expected to be the primary source of the loan repayment, This might come in useful in a situation where you lose your job or experience other financial setbacks.
Lenders often wish to know exactly what you plan to use the money for and will consider the loan’s purpose. Is the loan to be used to purchase a car or a house? The terms and conditions of the loan, such as the interest rate and amount of principal, will influence the lender’s desire to finance the borrower. Other factors such as current economic conditions, will also be considered.
There are several reasons why an application might be declined. If your loan request is turned down, ask the loan officer what actions you could take to qualify in the future. Bear in mind that just because one lender turns you down doesn’t mean another lender will do the same.
Different creditors may reach different conclusions based on the same facts. Where one creditor may find you an acceptable risk, another may adopt a more conservative stance and deny you a loan. Your borrowing behaviour largely determines your credit worthiness. It is thus important to build a good credit history and repayment culture, always committing to honour all your obligations as they fall due.
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