In general, a person or company’s ability to secure a loan depends on the confidence that the lender has in their creditworthiness. Creditworthiness—which has to do with the borrower's ability and willingness to pay—is one of many factors defining a lender's credit policies. Creditors and lenders utilize a number of financial tools to evaluate the credit worthiness of a potential borrower.
Lenders must evaluate the risks of lending money to other individuals/organizations. A creditor usually looks at five factors: capacity, collateral, capital, conditions, and character.
- Capacity: The present and future ability to meet your financial obligations. Some of the areas examined would be your source of income, work history and the amount of debt that you already owe.
- Collateral: The money that comes into your account is the primary source for the repayment of a loan, but collateral also provides lenders with a secondary source of repayment. So, if it happens that one is unable to repay the loan, the collateral, which can be a house or car, will be taken by the lender, in replace of the loan.
- Capital: Capital is the money that shareholders have personally invested in the business. It represents the assets that business owners have at risk should the business fail. Even if you are not required to post collateral, many creditors express a preference that you have assets other than income that could be used to repay a loan.
- Conditions: This has to do with factors on ground when someone is applying for a loan. When you apply for a loan, the lender takes into account the economic climate of the country, for example. If the economy is bad, one may not make the gain they hope to make, and that will affect the repayment of the loans. The lender also looks at the intended purpose of the loan. For example, if you are applying for a loan to finance a ceremony, it will be viewed differently than if you need the loan to start a business.
- Character: This boils down to trustworthiness, promptness in paying your existing loans, other credits facilities taken, and your credit history.
In the past, all the above may have been sufficient to get a loan with, but in today's information age, much more is required to ascertain if an individual or Company is creditworthy.