Why credit-worthiness of an applicant is assessed?

Creditworthiness is an important business and personal asset each person has to manage. This is an asset which could make or break business relationships and interestingly in  some cases, personal relationships. This is a  complex abstract concept that is evaluated in many ways by different entities. The factors contribute to creditworthiness is really dependent on the specific evaluation case.

This article explains how one can determine a consumer’s creditworthiness and affordability,  in  other  words,  a  consumer’s ability  to  repay  debt.  So  what  is creditworthiness?

Creditworthiness

Definitions to summarize creditworthiness have existed for as long as credit has been extended to individuals and organizations. With the promulgation of the Act, the standardized definition of creditworthiness has to be taken into consideration. Any definition of creditworthiness needs to withstand any test in terms of the NCA. Any definition associated with creditworthiness should therefore fall within the ambit of a consumer’s:

          Affordability

          Credit history

Doing a proper affordability calculation and credit risk assessment based on the credit history of the consumer will allow the credit provider to determine the creditworthiness of the consumer. Doing an investigation into the creditworthiness will also ensure that credit is not extended recklessly and that the consumer is not over-indebted.

So, when is a consumer over-indebted?

A consumer is over-indebted when:

The consumer will not be able to satisfy the requirements of obligations in terms of credit agreements; and The consumer will not be able to satisfy those requirements in a timely manner.

In  the  following  sections  we  are  going  to  consider  how  to  assess  the creditworthiness of a consumer in terms of his/her credit history and affordability. A consumer’s creditworthiness has traditionally been determined by a number of factors, a few examples include:

          Record of payments in the past

          Income

          Regular expenses

          Current debt and the repayment of such

          Employment

When assessing the creditworthiness of the consumer, the following credit qualities of the consumer must be investigated:

          The payment record of the consumer

          The income of the consumer

          The current exposure in terms of debt of the consumer

          The employment prospects of the consumer

          The residence of the consumer

          The age of the consumer

          Marital status of the consumer

          The need for the credit

          The influence of any economic variables.

State how will you deal with existing borrower needing enhancement of the credibility

what aspects are to be taken into consideration in assessing the creditworthiness of a prospective borrower

 

A consumer‘s creditworthiness has traditionally been determined by a number of

Factors, a few examples include:

·       Record of payments in the past

·       Income

·       Regular expenses

·       Current debt and the repayment of such

·       Employment When assessing the creditworthiness of the consumer, the

following credit qualities of the consumer must be investigated:

·       The payment record of the consumer

·       The income of the consumer

·       The current exposure in terms of debt of the consumer

·       The employment prospects of the consumer

·       The residence of the consumer

·       The age of the consumer

·       Marital status of the consumer

·       The need for the credit

·       The influence of any economic variables.

what do you mean by credit worthiness

In competitive market, which of the variable and fixed pricing as banker you would advocate

 A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest rates change. As a result, your payments will vary as well (as long as your payments are blended with principal and interest).

Fixed interest rate loans are loans in which the interest rate charged on the loan will remain fixed for that loan's entire term, no matter what market interest rates do. This will result in your payments being the same over the entire term. Whether a fixed-rate loan is better for you will depend on the interest rate environment when the loan is taken out and on the duration of the loan.

When a loan is fixed for its entire term, it will be fixed at the then prevailing market interest rate, plus or minus a spread that is unique to the borrower. Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. Depending on the terms of your agreement, your interest rate on the new loan will remain fixed,

even if interest rates climb to higher levels. On the other hand, if interest rates are on the decline, then it would be better to have a variable rate loan. As interest rates fall, so will the interest rate on your loan.

This discussion is simplistic, but the explanation will not change in a more

complicated situation. It is important to note that studies have found that over time, the borrower is likely to pay less interest overall with a variable rate loan versus a fixed rate loan. However, the borrower must consider the amortization period of a loan. The longer the amortization period of a loan, the greater the impact a change in interest rates will have on your payments.

Therefore, adjustable-rate mortgages are beneficial for a borrower in a decreasing interest rate environment, but when interest rates rise, then mortgage payments will rise sharply.