Introduction

A loan is an amount of money which is provided to borrower by banks and financial institutions at specified rate of interest for his various needs and purposes. There are different types of loans and these are specifically differentiated owing to the various specific needs of an individual, like home loans, education loans, etc. Banks and financial institutions demand certain documents from the lender to approve the loan after accessing all the relevant information about the borrower. Banks charge an interest rate from the lender, which is comparatively less than money lenders. There are various factors which affect the quality of a loan, like interest rate, repayment of the loan, credit score of the lender, etc. This article provides a general overview of the factors taken into consideration when determining the quality of a loan.

The Five C’s of Lending

There are generally five factors which are considered before granting a loan to the borrower. These factors are often referred to as the “Five C’s” of lending. These 5 C’s of lending stand for capacity, character, capital, collateral, and conditions. Click good at money lending in ang Mo kio. The lender accessed these conditions to know the creditability of the borrower to pay back the loan to the financial institutions.

·         The borrower’s character in credit refers to the credit history of the borrower and is used to determine how well the borrower has managed the credit. It is ascertained by the credit score of the borrower.

·         Capacity refers to the ability of the borrower to repay the loan on agreed terms and conditions by accessing their income.

·         Capital here means the amount which the borrower pays to avail credit from the banks, like assets, savings, etc.

·         Collateral means the security provided to a bank as a form of secured loan.

·         Conditions of credit refer to the terms and conditions of the lender, like interest rate, proposed or available loan amount, etc.

How factors affect the quality of a loan

“Quality of loan” means the probability of repayment by the borrower to the lender with reference to the loans provided by banks on agreed terms and conditions. There are various factors which affect the quality of a loan, like repayment, interest rates, inflation (a general increase in the price level of the economy), unemployment, and economic growth. Both macroeconomic and microeconomic factors together affect the quality of the loan.

Conclusion

A loan is provided to the borrower by the lender to fulfil his various needs at an interest rate. Banks provide these loans after accessing the loan application on the five C’s of lending. The quality of a loan is affected by various factors like profitability ratio, net margin, inflation etc.