Character refers to credit history, borrower’s reputation or track record for repaying debt. This information appears on the borrower’s credit report generated by credit bureaus. In India, there are majorly 4 credit bureaus namely CIBIL, Experian, Equifax, Highmark.
A credit report contains information on borrower’s past debt and whether they have repaid them on time. Many lenders use this information to evaluate the borrower’s credit risk. So lenders have a minimum credit score requirement before an applicant can be eligible for a loan. The general rule is, higher the credit score, higher the likelihood for getting loan approval.
In India CIBIL (Credit Information Bureau India Ltd.) is a credit bureau that provides credit score known as CIBIL score. CIBIL score is a 3 digit number ranging from 300 to 900, which signifies the creditworthiness of an individual. These credit bureaus use their own proprietary calculations and algorithms to estimate your best credit score.
Capacity measures the borrower’s ability to repay a loan by comparing income against recurring debts and assessing the borrower’s debt-to-income (DTI) ratio. DTI measures the applicant’s ability to manage debt repayments. It is calculated by dividing the total monthly debt obligations, such as minimum credit card payments, auto loan, student loan and the like, by net monthly income. The ratio is best calculated on a monthly basis. The DTI ratio helps lenders evaluate how much additional debt an applicant’s financial situation will allow him to handle. A low DTI shows you have a good balance between debt and income. It is worth noting that sometimes lenders are prohibited from issuing loans to consumers with higher DTIs as well.
Lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default. Borrowers who can place a down payment on a home, for example, typically find it easier to receive a mortgage.
The amount of contribution from borrower’s side may affect the rates and terms of a borrower’s loan. Generally speaking, larger down payments result in better rates and terms.
Collateral can help a borrower secure loans. It gives the lender the assurance that if the borrower defaults on the loan, the lender can get something back by repossessing the collateral. Often, the collateral is the object one is borrowing the money for: Auto loans, for instance, are secured by cars, and mortgages are secured by homes. For this reason, collateral-backed loans are sometimes referred to as secured loans or secured debt.
They are generally considered to be less risky for lenders to issue. As a result, loans that are secured by some form of collateral are commonly offered with lower interest rates and better terms compared to other unsecured forms of financing.
The conditions of the loan, such as its interest rate and amount of principal, influence the lender’s desire to finance the borrower. Conditions can refer to how a borrower intends to use the money. The lender will need to understand the condition of the business, the industry, and the economy, which is why it is important to work with a lender who understands the industry. The lender will want to know if the current conditions of the business will continue, improve or deteriorate. Furthermore, the lender will want to know how the loan proceeds will be used- working capital, renovations, additional equipment, etc.