Creditworthiness - how banks assess borrowers before granting a loan
My experience shows that many people search the internet looking for explanation on how the banks assess creditworthiness of the potential borrower before granting a loan. Below I am explaining this issue shortly. It’s quite important, because before the 2008 crisis there were many too many loans given to clients who shouldn’t have received it.
Every bank before granting credit should assess the creditworthiness of the borrower. It means a person’s ability to repay installments in a specific amount. The result of the test is to determine the the maximum monthly installment, which the candidate is able to pay.
Bank evaluates the creditworthiness, taking into account two main factors:
- Fixed monthly income;
- Monthly maintenance costs - the costs incurred on a monthly basis to ensure normal operation (rent, electricity, water, telephone, etc.).
In addition, the creditworthiness may be affected by a variety of other factors, such as residence, place of work, property ownership, number of persons in the household, etc.
Please note that the bank usually does not calculate the maximum amount that you can borrow, but the maximum monthly installment. That is, if for example the installment for a specified amount of loan, taken for 20 years, is USD 500, and the bank says you can pay up to USD 450 a month, extending the repayment period (let’s say - to 30 years) may be a solution. Then your installment falls to - let’s say - USD 400, and the loan in the specified amount will be available to you.
I hope the above explains the whole mechanism that the bank should implement in the procedures of granting loans.
Tags: loans
Loans and Banking | admin | 
November 10, 2008 5:00 pm