A course in borrowing 101
Key inputs in a credit score may include but are not limited to:
1) Debt Servicing Ratio (DSR): A ratio of gross income to total loan payments, i.e. loan payments /gross income. A debt service ratio below 0.4 or 40 per cent is considered to be favourable. That is, your total monthly loan payments, including the loan being applied for, should not exceed 40 per cent of your gross monthly income. People with a DSR above 40 per cent are considered to be risky borrowers and are more likely to be declined, or if accepted, likely to be charged higher interest rates.
2) Income Surplus: The amount of income remaining after deducting all regular monthly living expenses, including insurance premiums, existing loan payments and any proposed loan payments. An income surplus of 15 – 20 per cent of gross income is considered favourable.
3) Credit History: An account of your past borrowing relationships and whether all loan obligations were honoured in full and according to the loan schedule. Borrowers who have been delinquent and have not repaid past loans or who have repaid but were frequently late or delinquent on loan payments are considered high-risk and are likely to be declined, or if accepted, are likely to be charged higher interest rates and given stricter loan terms and conditions.
4) Stability: This is determined by how long a person has been with his current employer, how long a person has lived at his current address, and whether the property he occupies is owned or rented.
The assessment of the loan is usually a detailed internal process for any lending institution, and may require one or more reviews and levels of approval. Depending on the type of loan requested, the process may take up to three (3) working days. After assessing the application, the lender will decide whether to approve or decline the loan. The lender will advise the borrower verbally and in writing whether their application has been declined or approved.
Next week we will look at how to prepare for disbursements.
Claudja Williams works as a consumer advocate in the financial sector. The views expressed are her own.
