Lending is nearly as old as man himself. Once man became a settler, kick starting a new civilization built around the emergence of cities and trade, lending became a necessity. In some societies, lending is done mainly for altruistic reasons.
Nevertheless, lending is a big business in modern societies where banks create new money by lending out money to interested borrowers. Since lending is a very risky venture, over the years financial institutions have developed robust guidelines that shape their lending decisions. In this article, I write about 4Cs that are very important in the business of lending.
1. Character
Character concerns the attitudes and disposition of the borrower. It consists of the psychological being of the borrower from the perception of the lender. Unlike some other important considerations, it could be very difficult to identify a potential borrower with a bad character. This is because human beings are well known for concealing their true characters.
Therefore, it is the duty of the lender or its agents to subjectively but almost accurately assess the character of the borrower and determine whether he or she has willingness to pay back or not.
2. Collateral
Put simply, collateral refers to the securities of a loan. Usually, collaterals are items of precious value to the borrower, which are approved by law, and to which the borrower is willing to forfeit to the lender in the event of default.
The convention with collaterals is that its total sum should be greater or equal to the loan amount. A breach of this simple rule could result to default because the borrower may in the future believe that he or she has little or nothing to lose in the event of default.
The truth is that a loan is more secured if the collateral value far exceeds the loan amount.
3. Credit Score
Credit score refers to the credit points of the borrower. A positive credit score shows that the borrower is creditworthy while a negative credit score shows that a borrower is not creditworthy. A simple way to determine credit score is to analyze the credit history of the borrower and identify cases of default and prompt payment.
Credit score is one of the most important of the 4Cs because borrowers with horrible credit scores are highly likely to repeat the credit history. In some extreme cases, the loan could become a bad debt.
4. Capacity
Lastly, capacity refers to the ability of the borrower to pay back the loan. Capacity can be determined by looking at the balance sheet of the borrower and ascertaining what he or she can conveniently pay back after all expenses have been considered.
Capacity to pay back is so important that without it there will be serious problems with the repayment of the loan. So, this is not a factor to be ignored if the lender cares about recovering his money.
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Great article dear @gandhibaba. Its very important to know about lending money because money is the prime thing for which we always work for.
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Thanks for stopping by, my good friend. Good to see you too.
You're welcome my friend.
To me lending with profiteering or aim of making Money is quite good especially when one considers the 4c you've stated above here. I've been a lender and I use to consider a person's worth to see if they can really part pay back in the long run. It was lovely reading this my friend
That means that you've been doing the right thing, following the 4Cs. Thanks for stopping by.
I have borrowed huge amounts of money on various occasions. This article appeals to me perfectly. With my experience concerning loans i would not advise any one to go in for loans. Other wise thank you so much for the
great C's to put into consideration by the lender before issuing out a loan to someone. Money lending business is a very risk business and these 4 C's are very key principles that must be considered with no compromise in order for the lender to minimize the risk of losing his loaned out cash.
I am glad that you found this article worthwhile. Surely, the 4Cs are standard lending principles. Cheers!
I am glad that you found this article worthwhile. Surely, the 4Cs are standard lending principles. Cheers!