Credit evaluation is a drawn-out process that analyzes the ability of an individual or business to obtain loan approval. According in Inc, the lender’s ability to grant credit is heavily dependent on the creditworthiness of the borrower and confidence bestowed on them to repay the money. Creditworthiness is essentially a history of trustworthiness and financial soundness. The lender will also consider aspects like the size of the burden, loan size, commitment period, frequency of borrowing and responsibilities of the loan. When analyzing the size of the burden, the lender is often keen to establish the borrower’s earning power and ability to repay the loan.
The borrower’s earning power should ideally exceed the demands of the scheduled payment. The duration of commitment is another important consideration in the loan approval process. To cover the risks associated with long-term loans, lenders often charge higher interest rates. A customer with a high frequency of borrowing and repaying can use the opportunity to build a solid reputation with the lender. A good reputation is critical in attracting favorable loan terms. With regards to responsibilities, most lenders tend to support causes that bring greater good to the host communities. One of the communal ventures that may attract the interest of lenders is a plan to construct low cost housing to improve the standard of living of area’s residents.
Evaluating loan applicants
The credit risks that lenders look for when analyzing a borrower’s ability to repay a loan include an analysis of the borrower’s financial situation, income and credit or repayment history. According to integrated financial services firm Wells Fargo & Company, these core elements can be narrowed down to 5C’s, namely:
1. Credit history – when analyzing credit history, the lender will delve deep into your credit history to know the lenders who have given you money; the type of credits you have taken before and your record of repayment. Your credit score will also be analyzed to ascertain the risk levels.
2. Collateral – a request to provide collateral normally applies to security backed loans. In most cases, the lender will request collateral to cover home equity or car loan. Before any collateral is accepted, the assessors will subject the asset to a thorough scrutiny to determine its market value. Non-collateralized assets may also be included in the assessment.
3. Capital –capital evaluation takes into consideration the borrower’s primary income, investments portfolio, savings and other underlying assets that may be used to cover the loan. In case the borrower loses a job or is unable to repay the loan as agreed, amends can be made using the capital.
4. Conditions – the lender will scrutinize your plan or the purpose for getting the loan. You can always find out the areas the lender is more willing to support to reap favorable terms.
5. Capacity – this is a broader determination to establish if you are comfortable repaying the loan using the listed resources. The assessment takes into consideration; amount and type of income, employment history and the overall the financial stability of the borrower.
Overall, lenders are more willing to give money to borrower’s whose net earnings surpass the debt obligations and any expected contingencies. Special financial tools have been developed to help lenders assess credit risks and ensure the business stays on the track.
Need Financing: Choose an Ideal lender!
The ability of financial institutions to furnish loan also depends on their strength. The health of these institutions is usually determined by such factors as liquidity, profitability, quality of assets and capital sufficiency. Profitability is the capacity of a financial institution to generate sufficient revenues and stay profitable. Capital sufficiency or adequacy, on the other hand, is the financier’s level of capitalization and ability to withstand stress. A financial institution with good liquidity should be in a position to fund its short-term financial commitments. Asset quality is a broader term that is used in banking to refer to customer portfolio and analysis of bad loans.
August Funding is an example of a solid, fast rising financial institution. The company understands the importance of credit in advancing the course of business and providing for one’s family. This is the reason it supports long term investment plans and short-term business needs to boost liquidity. The company’s loan approval procedure follows Acts proffered by the Federal Trade Commission such as the Equal Opportunity Act and Fair Credit Reporting Act. The team is supported by friendly customer support.