Most of us will at some point in our lives think about getting a loan from a financial institution. This could be anything from a personal loan, to a mortgage to one that gets you through your student years. Covid-19 may well have given you extra cause to think about getting one for the first time.
The thing is, different financial services companies have different criteria for deciding on whether or not to give you a loan. So there’s no “one-size-fits-all” approach to getting a loan.
But if you wanted to keep in mind a simple, high-level template, think along the lines of the “Four Cs” that lenders often consider as part of their decision-making process:
Capacity
‘Capacity’ looks at your present and future ability to meet your payment obligation. At the end of the day, you have to pay back the money you’ve borrowed.
So if you’re not working, are about to retire or already have a huge amount of outstanding debt, it will likely have a bearing on your ability to get that loan. That may be particularly relevant in this period of change in our working world. Covid has taught us quite a few things about the need to adapt.
Capital
‘Capital’ is all about the value of your assets and your net worth – essentially your personal balance sheet of what you own and what you owe. You may not have much money coming in at the moment. But the fact that you have a fair bit of cash to fall back on may mitigate that.
And lenders have to think in terms of worst-case scenarios. What if your income situation isn’t healthy at the moment? Do you have any assets that could be used to cover your obligations if required? Time to take a proper look at your finances.
Character
So, many people don’t think enough about their payment histories. Your reliability in paying debts (and bills in general) plays a big role in your creditworthiness. It impacts whether or not a lender will be willing to lend, how much they’ll be willing to lend and how much it will cost you to borrow. No doubt, there are wider implications that can be applied to the world of work. It’s on a deeper level than knowing how to dress your future self.
If you’ve had a checkered past in keeping up to date with payments on a car loan, why should a lender think that you would be any different with a personal loan you want to take out? Your financial integrity covers both your willingness and your ability to pay the money back.
Collateral
In a variety of situations, lenders will only be willing to lend you money if you have property or assets to act as security for the loan. For example, you could be a business owner with inconsistent revenues. Or you could have poor credit. Or you could be a business startup. This setup tends to work out well for lenders because they can lower their risk by having a claim on your assets if you don’t pay up.
Every bank will have their own official lending standards and criteria. But if you keep the “Four Cs” in mind, and you consciously work to navigate the system, you’ll be better placed to get that loan on decent terms.
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