How Lending Institutions Select Their Borrowers

As for an individual or small business, the best method to determine the amount of credit you can safely assume is to develop an accurate personal budget. Before applying for a loan, decide whether or not you can meet the essential expenses and afford the new loan payments. Some people add all their monthly expenditures and subtract that sum from the monthly pay. Others look for ways to cut back on their spending (such as they will eat out less). They will cut down on entertainment costs. It would help if you determined which method or a hybrid of both will work best for you.

There is a basic rule that lending institutions like to follow. It is a Dept- Payments-to-Income- Ratio. To calculate this ratio, divide your monthly debt payments (excluding mortgage payments and other long-term liabilities) by your after-taxed (Net) monthly income. Lenders wish to see that you do not spend more than 20% of your net income. Although 20% is the maximum, many experts suggest that one should be 15% of courses at most. The lower this percentage is, the better the lender’s standards.

However, this rule is only partially concrete. Lending institutions also apply the Five Cs of Creditworthiness. Whenever you apply for a loan or a credit card, you should understand the factor that helps determine whether the lender will extend your credit. These institutions are not ignorant; when they extend you credit, they know that some consumers will become unable and others unwilling to pay their debts. It is for that reason that many lenders have adopted the following policies. This is often referred to as the five Cs of credit.

The Five Cs of Credit:

Character:

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Character

• Creditors wish to know your character- what type of person are those they lend other people’s money to. Lending institutions do not lend their money; they lend other people’s money. These people expect and often demand that they see a return on the capital they allow these institutions to use. If the institution does not give them their desired returns, they will enable others to use their money because their survival depends on making the right choices. They want to know that their borrower is stable and trustworthy. Therefore, they ask for personal and professional recessional references. They will check to see if you have a history of legal trouble. They may ask the following questions.
• Have you had prior credit?
• How long have you lived at your present residence?
• How long has your present employer employed you?

• Creditors wish to know if you can repay the loan.

Your present income and debts will affect your capacity to repay the loan. It will also show that you are capable or not capable of acquiring additional debt. If you already have most of your income allocated to debt, lending institutions may not be willing to extend your credit. Lending institutions are not our friends. They are businesses. Some are for-profit businesses, and others are nonprofit organizations, but they are businesses; they do not see your situation they know the risk they take when they extend credit. They see their demise if they make bad choices. They may ask:

• What is your position, and what is your pay?
• Have you other sources of income?
• How much is your current debt?

Capital

• What are your assets and your net worth? Assets are the items you own, and their net worth is the value assigned to them. You may have a low-paying job because you have cash from the lawsuit you won, or you hit it big at the tables in Vegas. You may have inherited a fortune in Real Estate or the family business. You may have been frugal with your money from an early age to today, your 70th birthday, and you have stocks, bonds, and capital. They want to know your assets because they can determine that you have liquid assets that somebody can quickly turn into cash. They need to know your liabilities because you may have great assets but more significant liabilities. They may be impressed that you won $100,000,000 playing the lottery, but it may be gone and of little use to them if you have yet to use it as a toll. 

https://atonce.com/blog/what-percentage-of-lottery-winners-end-up-with-financial-troubles

Collateral

• What if you can’t or refuse to repay the loan? This one is simple. Creditors want to know what you can pledge against your loan. If you cannot make your house payment, the lenders will foreclose on your home. It has gone up in value. They acquire it for less than it is worth and can resale it to recover their losses plus a little boot.
  • What are the assets you own? Car, Home stacks, jewels

Conditions

This refers to general economic conditions. It is harder to borrow funds during a recession. But this question goes beyond you. Although they want to know your security, they look into the safety of the firm that employs you. It doesn’t matter that you make $100,000 plus this year if you work for a sole proprietorship with an owner who is in the hospital with cancer and is 95 years old. Likely, you’ll soon be unemployed. You may need to gain the skills to run the business as well as they did; therefore, the lenders see you as a greater risk.

When you apply for credit, the lender will review your application and check your credit history. 

When you apply for credit must lender will review your application and check your credit history.

The three major credit bureaus are

1. Experian: (P O Box 4000, Allen, TX 750213)
2. Equifax Credit Information Services, Inc, (P O Box 740256, Atlanta, GA 30374)
3. Trans Union, LLC, (P O Box 2000, Chester, PA 19016)

If you want a good credit rating you must use credit wisely.

A creditor must	Remember that a creditor cannot
Evaluate all applications on the same basis	Refuse you individual credit in your own name if you are credit worthy
Consider income from part-time employment	Require your spouse to cosign a loan. Any credit worthy person can be your cosigner if one is needed.
Consider the payment history of all joint accounts, if this accurately reflects your credit history	Ask about your family plans, or assume that your income will be interrupted to have children.
Disregard information on accounts if you can prove that it doesn’t accept your ability or willingness to repay.	Consider if you have a telephone listing in your name.

Note: Images on this blog site are from a free source. No image or group of photos are intended to represent the people I serve. I don’t care about Race (that is a politically correct term that I do not like because we are all of the same Race, the Human Race. I prefer the term ethnicity), color, religion, sex, gender, marital status, disability, genetic information, national origin, source of income, Veteran or military status, ancestry, citizenship, primary language or immigration status. I am a service provider for all people. We will all rise together when we band together and help one another. Joseph Erwin is a Real Estate Broker, DRE # O2131799, and a CA general contractor # B 696662. He’s a member of the CRMLS and The East Valley Association of Realtors located in the Inland Empire region of Southern California.