Credit's Three C's: What Lenders Look for in a Loan Request

The three C's in credit terminology. What are they? They are the factors that lenders consider when they scrutinize your loan application form. They are capacity, character, and collateral. The mixture of these three is what decides the interest rate that the lender will give you and it also determines your potential risk on the lender's part.

Capacity - Your ability to pay back a loan is your capacity. For a lender, it is important to know your debt-to-income ratio. Speaking in mortgage terms, underwriting the underwriter will consider two ratios identified as your front ratio and back ratio. Your total housing expenditure (principle, insurance, interest, taxes) as a percent of your gross monthly income serves as your front ratio. If you have a monthly gross income of $4,000 and your housing expenditure is $1,102, then 27.55 percent will be your front ratio. Your housing expenditure and all your other installment and revolving dues divided by your total personal income before removing deductions or taxes (or your gross income), on the other hand, is your back ratio. Your loan request will get a bigger chance of being granted and will be charged a lower interest rate when your debt ratio is low.

Character - Your credit account history and your records in paying your past loans are what make up your character. Lenders can get this data from credit-reporting companies like TransUnion, Experian or Equifax. In a normal setting, your credit reports coming from the three credit reporting companies will be investigated by the lender. Credit scoring modules, which gauge your borrowing practices and give them numerical grades between 300 to 850, are used by credit agencies. When your credit grade is high, then the better your risk or character is. The opposite is also true. If your grade is low then you are considered a high-risk person and will be given higher interest rates.

Collateral - Most lenders need to see your assets because these assets become your collateral when you request a loan. Ask yourself this question before you file a loan: "Do I have enough assets to show as collateral?" The more collateral you have the more chances your loan application will be approved. That's why you have to list down every asset that you own when you are filling out your loan application form.

Everybody who is requesting for a loan wants a good offer from their lenders. Remember that capacity, character, and collateral play a major role in determining your loan's approval. More assets, higher credit scores, and debt-to-income ratios that are low will more likely get a low interest-rate loan than that of the opposite. Another thing to note is that it is not advisable to take a loan with high interest rates because it will cost you some fortune in the long run. Therefore, watch out for your 3 C's of credit and make sure you keep a good credit reputation.