The borrowing community often expresses serious concern about the seeming reluctance of banks to lend. It is argued that bank managers have become so risk-averse that they would rather invest in secured short-term securities rather than lending money to borrowers that are badly in need of financing. Indeed banks are accused of looking for every reason not to lend, which defeats the primary purpose of their financial intermediation role, the very reason for their existence.
The Credit Bureaus licensed by the Central Bank of Nigeria have complemented the services of deposit banks since 2009, however there is a need for increased activity and data to give banks additional comfort as they embrace consumer lending. Before the credit bureau infrastructure was introduced, banks had to rely primarily upon information provided by their customers. In this regard, “serial defaulters” were able gain access to credit from several banks simultaneously without fully disclosing their indebtedness and without any ability or intention to repay.
A credit bureau collects and collates detailed financial data on individuals and companies from public sources and lending institutions with whom they have a borrowing relationship. It then makes this information available on request to subscribers for the purposes of credit assessment. This should make the environment more conducive to lending by reducing loan-processing time, enhancing informed lending decisions, and ultimately, reducing the level of non-performing loans.
Equipped with some knowledge of “The 5 C’s of Credit”; character, capacity and collateral, capital and conditions, you can be better understand what lenders look for in arriving at their decision to extend or withhold credit.
Character, is the most important of the C’s. A borrower of good character will make every effort to fulfill all obligations as they fall due. Creditors will take into account your current salary, credit history, and current debt. The track record you have established while managing credit and making payments over time and living within your means will be important. Signs of stability such as how long you have lived at your present address, whether you own or rent your home and the length of your present employment are also important considerations.
From your credit history, personal background, and borrowing behaviour, a lender may decide whether you possess the integrity, honesty and reliability to repay your debts.
Capacity refers to your ability to repay a loan and how much debt you can comfortably handle. Lenders need to be able to determine whether you can afford to pay off your loan. The lender will look to see if you have been working consistently in a job that is likely to provide enough income to support your borrowing. Past income and employment history are good indicators of your ability to repay. Income streams are analyzed along with any other obligations that could interfere with repayment.
Lenders use the debt-to-income ratio to measure how likely you are to repay the loan. They want to know what your monthly income is and any supplementary income from bonuses, dividends or rental income. The debt-to-income ratio is calculated by summing up all your existing monthly debt such as your rent or mortgage payments, car loan payments, or credit card payments, including the monthly payment for the item you are trying to finance. This total number is then divided by your income. Most banks would be uncomfortable if more than 35 percent to 40 percent of your income is spent on debt servicing.
Most lenders have stipulated minimum requirements for loan applications. The more you earn in a year, the more qualified you are likely to be. But even if you are a high-income earner, if your debts are equally large, lenders may hesitate to lend you more money.
A loan may be secured or unsecured. When a loan is secured you must pledge something you own as collateral. This will include your bank accounts, investments such as stocks, mutual funds, bonds, property, and other assets.
Capital represents the savings, investments, and other assets that can be liquidated if necessary to help you to repay the loan. It is important to have some reserve to back up the loan should there be an interruption of funds you may need to make a down payment or for other costs. While your salary or other income are expected to be the primary source of the loan repayment, This might come in useful in a situation where you lose your job or experience other financial setbacks.
Lenders often wish to know exactly what you plan to use the money for and will consider the loan’s purpose. Is the loan to be used to purchase a car or a house? The terms and conditions of the loan, such as the interest rate and amount of principal, will influence the lender’s desire to finance the borrower. Other factors such as current economic conditions, will also be considered.
There are several reasons why an application might be declined. If your loan request is turned down, ask the loan officer what actions you could take to qualify in the future. Bear in mind that just because one lender turns you down doesn’t mean another lender will do the same. Different creditors may reach different conclusions based on the same facts. Where one creditor may find you an acceptable risk, another may adopt a more conservative stance and deny you a loan. Your borrowing behaviour largely determines your credit worthiness. It is thus important to build a good credit history and repayment culture, always committing to honour all your obligations as they fall due.