Think you should be eligible for a loan? You might not be as trustworthy as you think.
It can be easy to think you’re eligible for a loan without putting yourself on the other side of the lending fence. To determine whether they’re likely to get their money back from a loan, lenders often consider “The 4 Cs”. These are:
However, it’s not always as cut and dried as it seems. Find out more about each of the 4 Cs below.
How to judge character
Even Mother Teresa might have failed a bank character test; looking after the sick and poor isn’t necessarily a good financial move. When lenders analyse your character, they’re considering it in relation to the likelihood of you repaying a loan. This includes:
- Whether you have stable living arrangements and a stable job
- If you’ve taken out loans in the past and what you used them for
- Whether you’re an organised person who’s in control of your finances
- Whether the lender believes you will be fiscally responsible
These, and other elements of your character, are considered both as standalone factors and in relation to your credit history. Lenders will take your financial obligations seriously and look at your character for reassurance that you also take them seriously.
How would you judge your own character?
If you want to put yourself in the lender’s shoes, one of the first things to do is to check your Equifax credit score. This is free, secure and won’t leave a mark on your credit history.
Your credit score is often one of the first things that lenders look at because it’s a way to see what a borrower is like at a glance. By checking your credit score you can see a snapshot of your own creditworthiness.
It’s also important to remember that lenders only know what you’ve detailed on your application and what’s on your credit file. There is no room for excuses in this information, only the facts are there.
Set aside any extenuating circumstances and sheer bad luck (if applicable) and start looking at yourself as just a number on paper. Consider the reasons behind any negative information on your application or your credit file and see whether or not they should count against your character.
How to judge collateral
Lenders love collateral because it makes loans much less risky. Collateral is an asset you put up against your loan. Cars and houses are some of the most common types of collateral because they’re valuable and can be sold to recoup expenses.
However, most lenders prefer not to claim collateral in lieu of money. They’re moneylenders, not car dealers and they often won’t get their money’s worth from reclaimed assets.
Loans with collateral are known as secured loans, while those without are called unsecured loans. More collateral means lenders will often be more lenient in their judgements, while less collateral means you might have to score higher on the other 3 Cs.
How would you judge your own collateral?
The first thing you would look at is what type of collateral you would use and how much it’s worth. Many lenders know how to value houses, or they might get a professional property valuation done first.
If you’re putting up your car as collateral, the lender will look at the current market value and ongoing depreciation to determine how much it can be sold for.
Think about the assets you would you offer as a borrower and whether you would really want them if you were a lender.
How to judge capability
One of the main considerations is your capability to repay the loan. Sometimes this is as simple as the lender looking at your income vs your expenses and seeing if it fits into their loan serviceability ratios.
Having more than one source of income is also highly regarded because it’s more robust than just a single stream. It also means you’re more likely to be able to keep up with repayments even if something goes wrong.
How would you judge your own capability?
This is pretty easy to do. Look at your budget and see whether or not a loan can fit. You can also use the borrowing power calculator below to get an estimate.
How to judge capital
Capital is generally considered a combination of collateral and capability. Specifically, it looks at the value of your assets outside any that may have been listed as collateral. For a business loan, capital is looked at in relation to the total value of business assets, while for home loans it is looked at in relation to property value and deposit size. For personal loans, lenders might look at your personal capital as an indication of your financial security.
Someone with high levels of capital will have a lot of assets that can be sold off to meet repayments, while someone with low capital might be out of options and the lender might be more likely to lose money.
How would you judge your own capital?
Take a look around at what you own and how much it’s all worth. Ask yourself whether you’d be willing to sell your (hypothetical) prized stamp collection on eBay if you had to. Look at the total value of your assets and consider it in relation to the total value of your loan. If the former is a lot higher than the latter, you can judge yourself fairly well on capital.
You don’t need to take these steps every time you want to take out a loan. In fact, you probably don’t want to. If you’re after a personal loan, then there are a lot of different options available for different borrowers, purposes and personal circumstances, so make sure you shop around to find the best loan for you.