The three Cs of loans

Lenders evaluate three main criteria when considering an extension of credit: the consumer’s ability to pay, any collateral offered as collateral, and its character. Although the representative of the lender may not know the borrower personally, all the information to make those determinations is included in the credit report and is counted in the credit score. Restricting credit activity to those with higher credit scores minimizes the overall risk potential facing the lender.

• Capacity – This calculation of the amount of debt the borrower can realistically repay is based on income and existing debt. Lenders also consider the borrower’s employment history and the likelihood that their income will increase. A borrower’s steady career and steady income may warrant an increased ability estimate and improve their loan qualifications.

• Collateral – Assets that a lender can obtain to satisfy an unpaid debt are considered collateral, whether directly pledged as collateral for the loan or not by the borrower. Creditors can make a loan dependent on the borrower putting up sufficient collateral to secure the debt, depending on the borrower’s credit history and the size of the loan. Even if the loan was made without a collateral requirement, the lender can still file a lawsuit to force the borrower to give up those assets as payment on the defaulted loan.

• Character – Several factors are evaluated to determine the financial character of the borrower. Stability in employment and residency are considered. Whether the consumer owns, rents, or leases matters. Although the credit report cannot indicate the value of checking or savings accounts, keeping those accounts current are signs of a financial nature.

The data models used by credit bureaus to calculate consumer credit scores influence each of these lender requirements. Before credit is extended, lenders can preset limits, rates and the term automatically based on the consumer’s credit score. Most major lenders have procedures in place to review these automated decisions, if circumstances suggest the need. Consumers can generally request a review of their credit report from major lenders to increase their credit limit or lower their interest rate.