Imagine how things would have been if lenders approved every application. I don’t think it would have been possible to sustain businesses. There is always a probability of borrowers not obeying their obligations.
Whenever a loan defaults, lenders incur significant losses. Even if the loan amount may be recovered with time, the cost involved in the recovery process could be quite high. For this reason, lenders subject borrowers to eligibility tests before approving loans.
Assessing borrowers and their ability to repay the loan within the required time is vital. There are so many indicators that might be used in this regard.
One of the most popular approaches is the credit score. This is a three-digit value used to evaluate the creditworthiness of borrowers. Other common tools include the debt-to-income ratio, the net asset value, and proof of income.
But what is involved in the assessment process? Well, in this discussion, we will examine the concept of credit evaluation and the significance of the three C’s of credit. You will benefit fully by following right to the end.
The Three C’s of Credit
A credit score is a three-digit number used to evaluate the creditworthiness of borrowers. The score ranges from 300 to 850 points.
It is such a comprehensive formula that considers several factors, including how a borrower dealt with previous credit, the current debt obligation, and the income level.
The score is dynamic and might change either positively or negatively. The critical factor determining the direction of the movement includes the accrued debt and how one manages bills.
Three Cs of credit influence an individual’s credit score, these are;
- Character
- Capital
- Capacity
These are the critical areas that lenders pay attention to while deciding whether to lend to you. The following is a brief overview of each of these factors.
Character
Lenders often determine if the rectitude and trustworthiness characterize you to repay the loan. The following questions may be asked;
- Have you ever utilized credit?
- Are you able to settle your bills right on time?
- Is your credit history good?
- Are you able to offer a credit reference?
- For how long have you been working where you are now?
Capital
The lenders may want to determine if you have assets like real estate or automobiles. The following questions might be asked.
- Which property can you use to secure the loan?
- Do you have any investments that can be used as security?
Capacity
This is the potential of a borrower to pay back the loan. In this regard, the following questions might be asked:
- Is your work steady?
- How many payments are you supposed to make?
- What is your prevailing debt?
Conclusion; Credit evaluation Is Essential
Credit evaluation is essential. It helps lenders make the right decisions when extending loans to borrowers. In this blog, we have discussed the concept of loan evaluation and the three Cs of credit. Also you must learn about the 5 c’s of credit.
You must also know about the 7c of creditworthiness, which deserves if a loan applicant will get a loan sanctioned.
