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We have many financial service providers with various models and credit policies making each organization peculiar and guided in approving and granting credit facilities to applicants. However, diversities exist in organization culture, policies and business models, but there are certain underlying and sure factors cutting across all players in their credit assessment and approval processes, we can refer this to the 12 Cs of Credit for Lending.
Remember for personal loans the details of these factors tend to be personal.

Here are my six:
- Character
- Capacity
- Capital
- Collateral
- Coverage
- Cash flow


Before I add six more, I’ll show you how you can use tax returns as clues to the traditional six. Lenders in my tax return analysis training are often surprised you can use a tax return this way.

CHARACTER
Character in any financial transaction is about your integrity and honesty; the question the loan officer wants to answer is, if you will repay if you can? Its crucial factor because, borrowers can because of selfish reason refuse to honor loan obligations even when they are in good financial health and can repay.

Your bank officer / financial service provider is willing to figure out whether you can demonstrate honesty and keep your promises. This may be difficult to do at face value, but can be assessed with historical information, especially through documented evidences such as your bank statements, means of identification, tax payments, good recommendations from friends, colleagues and other lenders.

Can you show the bank that you are honest, and keep your promises? If you've had a loan or supplier credit before, did you always pay on time? Have you always paid your personal bills on time? Can you prove this to the bank? Do you have good references?



Some of the flash points are as follows:
- Instances of returned cheques on your account statement can indicate your inability to honor promises ordered by you through your cheques.
- Past due obligations on loans indicates the tendency to default again
- Inconsistencies in your means of Identification, which can be termed fraudulent, if there are no existing documents to show change of names or statuses.
- Differing claims from documented evidences i.e. income and existing loan obligations
- Keeping to time for meeting, this can tell if you will make prompt payments on loans
- Living ostentatiously above their financial means
- Spending trend and savings culture.

Character is like smoke, you can’t hide it for long. Be of good character someone is watching

CAPACITY
The question your loan officer is thinking in his head is, Does it look like you can repay the loan, and at the due date, if advanced?
The loan officer at this stage is checking for the borrower’s capacity in terms of his cash flow and liquidity. Cash flow to determine the frequency of your income, as this could be monthly basis or where some allowances are paid quarterly or annually upfront. Where cash flow can be sufficiently determined, the capacity to repay at due dates can be ascertained, or on the flip side the loan can be structured to fit into the income and liquidity structure of the individual.
The personal (salary) account will be reviewed as documented evidence that shows, the amount of income, the consistency pay day, the frequency of the payments and borrower’s liquidity and cash flow.
The statement will also indicate the consistency and compliance of the sources of income against which the loan is being structured, especially for employers who don’t honor payments on the set pay days, this becomes a risk factor for the lender and imminent default on the path of the borrower.

CAPITAL
Capital in personal loan? Do they have enough skin in the game? The take here for the loan officer is to determine if and by how much the borrower is committed to the repayment of the facility, also the source (job, trade, career e.t.c.) of income from which the repayment will come from, all this can be demonstrated by the borrower in a bid not to lose these important things, opportunities or privileges in the case of default.
The loan officer, by experience will determine these important things (financial, material, prestige, status e.t.c.) and ensure they are leveraged upon as a measure of commitment.

Do you have sufficient commitments, or leverage on other people under the loan arrangement, should the unexpected problems or hard times arise?

Examples of this type of capital are:
- Employment status; permanent or contract; probation or confirmed status…this would determine if the borrower is stable and have the stability and opportunity over the duration of the loan to repay the loan advanced.
- Materials substance ; property i.e. automobiles, fixed assets, property and their registration documents
- Relationships; guarantors, references and recommendations
- Professional certificates and medals; trade achievements and accomplishments i.e. happens a lot under the student loan schemes, where you only have access to your certificates when your student loan is fully paid off.
- Written and executed letter of consent to report to borrowers’ professional associations in cases of default

With the aforementioned the loan officer will then decide if there is enough capital for comfort.

COLLATERAL
Similar to Capital is the collateral element and the idea is to determine, the fall back arrangement where there is a failure on the repayment of the loan. The question the loan officer is willing to answer in this case is What if they can’t repay it?
There could be a consideration for place character, capacity, capital and the borrower passes yet repayment fails, what will the lender fall back on to recover the outstanding loan amount.

At this stage some of the elements of capital, the skin of the borrower in the game, can become collateral fall backs that can be liquidated.
Collaterals do not form the primary basis for which lenders should advance personal loans to borrowers, but they offer a possible basis for recovery when the unexpected happens and repayment fails.
As part of the loan agreement between lender and borrower, the valuable and tangible elements (capital) used in demonstrating commitment in the loan transaction can double up as collateral in cases of default, guaranteeing the recovery of the amount of loan advanced.
To qualify as collateral, the marketable value and tangibility of the capital element, assumes that they must be of higher value in relation to the loan amount advanced to the borrower.

Do I have personal collateral which I can offer? Is the property I own mine, or do I share it with my husband or family?

Examples of capital that can be adopted as collateral in personal loan arrangements are:
- Real estate – applicable in societies where 2nd mortgages are applicable
- Automobiles – this doesn’t apply to leases
- Precious stones and jewelries
- Medals
- Share certificates
- Savings Investment / Contribution schemes i.e. mutual funds
- Guarantors’ cheques

“This one is certainly getting more interesting. Lending institutions are reeling under the weight of real estate they never planned to own. As the economy softens, the value of collateral softens too”.

COVERAGE
Like the saying goes, “do not put all your eggs in one basket” the loan officer looks at the existence or the possibility of spreading your credit risk in granting you a loan advance. The spread can be in terms of:
- The spread in terms of tenor can be better short or long. The repayment period or tenor of the loan facility, a longer or shorter tenor can be determined by the loan officer as applicable.
- The spread of the loan amount among other borrowers, expels the concentration risk as much as possible, and spreading what is requested by an individual over a number of other borrowers thereby reducing individual exposures and tendencies of default.
- The amount of the loan repayment as a percentage of the net disposable income, according to regulatory frameworks in most countries, is acceptably about 30% of the net monthly income.
- The life insurance program of the borrower in cases of risk of death or disability
- The loan amount can also be insured from the risk of loss to prevent the occurrence of loses and secure protection for the lender.

Has the risk been spread?
A lender may not know how much insurance is adequate for a particular business, but certainly could spot that it is not there at all.


CASH FLOW
Is my job paying well and profitably? Do you have a good bookkeeping system that will allow me to demonstrate this to the bank? Can you produce my financial statements from this data? Is your cash flow sufficient to make the loan payments?
This is far more important amongst the other factors, since the whole essence of borrowing is to pay back at an agreed date from the cash flow ad liquidity of the borrower. Where the borrower cannot demonstrate a healthy cash flow it becomes an imminent risk in advancing a loan facility.
A borrower must be able to determine not just the amount of income expected, but also when it is made or paid, the frequency of payment, existing and recurrent obligations being serviced under the same level of income, their net disposable income, savings and liquidity level at all times through the year at a glance at the cash flow statement.
The cash flow of the borrower forms the basis for establishing the income and expenditure pattern of the borrower, and how successive loan requests are approved and structured.
If your income is paid on quarterly basis, it makes no sense to structure a loan that is payable on a monthly basis, thereby leading to default and past due obligations with accruing default charges when it can be structured appropriately.
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http://moneyfarmcapital..com/2015/07/the-x-factors-to-getting-personal-loan.html