For a large number of clients of loan companies and banks, the concepts of creditworthiness and creditworthiness may be quite vague. Very often both terms are used interchangeably, which is a big mistake – although both go hand in hand. However, these are the basic requirements that financial institutions set for potential borrowers. So let’s get to know both of these concepts to know your chances of getting a loan.
Ability and creditworthiness
Creditworthiness determines the extent to which a person will prove to be a trusted borrower. In a few simple words – it depends on how he previously fulfilled his financial obligations: installments, loans, debit limits. This is best reflected in the BIK register in which every consumer credit movement is recorded. Meanwhile, the creditworthiness is the client’s financial capacity to repay the loan, depending on several factors, such as his earnings or professional profile.
Income and creditworthiness in non-bank companies
Very often, bank customers are required to receive income from an indefinite employment contract and work at their current location for at least 3 months. There are banks that recognize annuities or even a mandate contract, but no bank will recognize income such as benefits, scholarships, specific work contracts, or income from the 500+ program. In a loan company, this is different and all listed income is calculated as creditworthiness, no matter how the income is received.
What is included in the creditworthiness calculation formula?
Net monthly family / household income. This is the sum of all income that the household receives, most often it concerns spouses. Loan companies, if they require confirmation of their income, it usually concerns the last 3 months. Therefore, the average from this period will be calculated for the application and this also applies to income from social benefits.
Number of people in the family. Rarely, more than two adults are counted as household members, most often marriage. Of course, banks do not include income earned on children or income earned by adult children or other persons living in the same house as creditworthiness.
Monthly fixed expenses. These are all fixed costs: fees for rent and utilities as well as maintenance costs (food, clothing, etc.). Banks assume that for one person, the minimum cost of living will be $ 600, for two – $ 1,000, and for 5 people – about $ 2,500. Of course, loan companies use lower thresholds and sometimes, to get an installment loan, you just have to have 600 dollars of income, not maintenance.
Liabilities (installments, loans, etc.). Of course, the less of these obligations the better. Active credit cards also count as liabilities, even if they are rarely used or not used at all. It should not be forgotten that the fact of guaranteeing a loan to someone else also matters, even if we do not have to pay the installment.
Security buffer. This conversion factor allows to protect the client against sudden loss of financial liquidity in case of additional minor expenses. Most often, this conversion factor is 0.8 the amount that remained after deducting expenses from income and is used mainly by banks that do not allow a monthly loan installment to be included in the monthly budget.
Other criteria on which creditworthiness depends
The formula presented above is obviously very simplified, taking into account only the equation “income minus expenses”. Banks usually use additional converters, which somehow give weight to previously calculated criteria.
The weight of the sum of income will be different if the applicant receives income from employment based on an employment contract of indefinite duration, and differently if it is a different type of contract – a mandate contract, a contract for specific work and even running his own business. Regularity of income and its stability is treated as a more important factor than the amount of income itself. This is also because, especially in the case of installment loans, it is easier in such a situation to simulate the borrower’s future financial standing, which, e.g. in the case of work for a work contract, will be difficult or even impossible.
For the above reason, the borrower’s age is often given appropriate weight. The risk of losing your job, a drastic reduction in your income, or situations that prevent you from paying your debts on time may change depending on your age group. In this way, the most rewarded is the so-called middle age, which has the greatest financial and family stability. Banks do not discriminate against any customers and a loan can be requested by a person of any age, if they are of legal age (although this will of course be reflected in the creditworthiness calculator), while non-bank companies usually exclude certain age groups from the group of their potential borrowers by setting a lower and upper age limit.
Safety buffer most important for the borrower
When applying for a loan, it is worth remembering the often forgotten security buffer, which in the event of sudden expenses may prevent the borrower from losing financial liquidity and the unpleasant consequences of failing to repay a loan or credit, and these are serious consequences (see article: I am not paying back the loan – what additional costs will I incur? )