Conditions
Conditions refer to the borrower’s intended purpose for the loan as well as the current economic climate. The borrower needs to state a specific purpose for how the loan will be used. The lender must take into consideration interest rates and business factors that could impact repayment of the loan.
Collateral
Collateral is used by a borrower to guaranteethe loan. If a borrower cannot repay the loan, the bank has security in this second source for repayment. Typical items used for collateral including buildings, equipment, cars, homes, and other high-value possessions. If the borrower defaults, the lender takes possession of the collateral as payment for the loan.
Character
Character is where credit history come into play. This is where the bank looks at a borrower’s personal and financial background. Current and past information about loans, credit, and a person’s timeliness in repayment is examined. Credit scores give lenders a snapshot of person’s character.
Capacity and Cash Flow
Capacity and Cash Flow measures the borrower’s ability to pay back the loan. Here, lenders look at the debt to income ratio (DTI) to understand exactly how the loan will be repaid. This is often considered the most important factor in determining credit risk.
Capital
Capital is the borrower’s investment in the purpose of the loan. The more a borrower contributes means less of a chance for default. Capital is calculated by subtracting a borrower’s liabilities from assets.
