It’s true the method used to arrive at a credit decision for a finance application will differ from bank to bank. It’s also true that the method will differ greatly depending on the type of finance (or loan) being sought. The greatest truth however is that all methods are based on, or derived from the “3 C’s of Credit”.
So what are the 3 C’s?
This is an assessment on an applicant’s likelihood of repaying the debt sought. It will be based on things such as:
– past credit history (defaults?)
– how the applicant reacted to any prior financial hurdles (business applicants)
– relevant industry experience
– length and stability of employment (individuals and couples etc)
– experience and stability of directors (companies etc)
As in the applicant’s capacity to repay the debt sought. This aspect of the assessment will be based on things such as:
– current incomes
– the stability of the income over a period of time
– proposed or projected incomes
– frequency and timing of incomes
– the applicant’s ability to maintain this income
In other words, security. A commonly held myth is that Banks are security lenders 1st and cash flow lenders 2nd. This is untrue – particularly in business finance. In short, an applicant strong in categories #1 and #2 will likely see a lender accept less security for a debt. Conversely if there is an assessed weakness in categories#1 and #2 a lender may seek to mitigate this via additional security or higher rates.