1. Benefits and Costs
c. Explain Why Lenders Would Be Willing to Make Loans to Some People and Not to Others
Even if you are sent a preapproved credit offer, lenders may decide not to extend you credit. Lenders look at three key factors –the Three Cs—when deciding whether to allow you to borrow money.
Character: Have you used credit before and paid previous bills on time?
Capital: What is your income and what do you own of value that could be used to repay a loan, thus making it a more secure loan? Sometimes lenders will ask for collateral for a loan. Collateral is assets pledged by a borrower to secure a loan. This means the lender can take possession of the assets if the borrower cannot pay back the loan.
Capacity: Do you have a job or other source of income with which to make payments? Do you have other debts that you will need to manage along with this new credit?
The way you handle credit is recorded in your credit report
. If you seldom pay on time, usually pay only the minimum, or have little that can be used to ensure a creditor that you can pay them back, you will be considered a poor credit risk. Credit bureaus use data sent by individual creditors, such as department stores, to compile reports on individual credit users. If you have poor credit, that doesn’t always mean you will not get any credit. It may mean, however, that you will have to pay a lot higher interest which makes the amount you pay back and your monthly payment higher than you may be able to afford.
On the other hand, sometimes it actually pays to borrow.
Let’s test your ability to apply the Three Cs to elements of a loan history.
Directions: Check whether you think the loan history facts on the left are indications of good Credit or Bad Credit (use your best guess).
Directions: Now, for the same statements, check a column based on which of the three key leading factors (character, capital, or capacity the lender will apply.