Loans and Lending

Qualifying For a Loan

A complete and thoroughly documented loan application, along with a credit report, provides the lender with the information needed to make a credit decision. Before granting you credit, or extending your current credit limits, most lenders will assess your creditworthiness using some variation of “The Five C’s of Credit,” the basic components of credit decisions.

Capacity
Capacity measures your ability to make the monthly loan payment based on your current income, other loan obligations, and monthly expenses. The lender is interested in your long-term ability to repay the loan, so your occupation, employment history, and educational background are reviewed.

Collateral
Collateral is the property that secures the loan in the event of default, such as a home or car being purchased with the loan proceeds. The loan agreement gives the lender the right to seize the property if the loan is not paid. The lender considers the type of property and the current and future value of the property when determining the loan term and amount. For example, the value of a car declines over time, so the term on a new car loan is typically longer than the term on a used car loan.

Credit
When you borrow money, your credit history is reported to one or more credit reporting agencies. Your credit history affects the loan approval decision, as well as the interest rate you receive. Lenders review your credit report and credit score to assess your likelihood of repaying the loan. Factors considered are:

• Your payment history on past and current loans
• The amount and type of outstanding credit
• Credit card balances compared to limits
• Recent new credit or credit inquiries

Capital
Capital considerations are your personal net worth (assets—liabilities or debt) and the amount of down payment you are making. A positive net worth means your assets (bank balances, investments, property, automobiles, etc.) are worth more than your outstanding loan balances. Not only do lenders look for a positive net worth, but they also expect you to have some “skin in the game,” so your ability to make a down payment is determined.

Character
Character is a subjective determination of the borrower’s trustworthiness to repay the loan. Lenders assess your character based on your job stability, profession, relationship with the bank and other factors.