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The customer also wishes to borrow 90% of the purchase price of the new vehicle. In looking at the full picture the loan officer recognizes that the customer's late payments were the result not of choice but of extenuating circumstance. In explaining the turndown of the loan application the officer cites the collateral issue as well as the late payments as reasons for not extending the loan. He points out to the customer though that in six months with no late payments on outstanding debt, and a larger down payment (capital) that the loan could be made. The moral risk of default is low and the loan officer recognizes this fact.
The obverse scenario is the customer looking to borrow $40,000 on a new Cadillac Escalade. The credit report indicates a similar 615 score however, there are considerable differences to the application. Borrower B. is ready to put 30% down on the car requiring only a 70% loan to value. Additionally, the borrower has a low debt to income ratio (a measure of solid capacity), and has additional collateral which he could use to secure the loan. Upon closer inspection though the loan officer notices a disturbing pattern; over the last decade the borrower has had two cars repossessed because of late payments, with the only explanation that the car was worth less than the loan and he no longer wanted to make the payments. There are also several repeated late payments on credit cards, and again the explanation that he simply did not...
In this context the loan officer's decision is relatively easy to understand. Borrowers who can demonstrate a character of repayment and trust will be given greater consideration than those who may have greater collateral and capacity, but lack sufficient character requisite for loan approval. The Five C's of Credit will always be the standard process of a loan officer's decision to extend credit. The character of the individual however, as portrayed in their credit history plays a significant, if not the most important factor in the decision to extend credit.
References
Credit Score Scale.net. Credit Score Scale. Credit Score Scale.net. N.D. 1. Retrieved May
13, 2011 from http://www.credit-score-scale.net/
Investopedia. The Five C's of Credit. Investopedia. N.D. 1. Retrieved May 12, 2011 from http://www.investopedia.com/terms/f/five-c-credit.asp
Pitt, David. Car Loan Approval Rates are Improving. MSNBC.com. July 19, 2010. 1.
Retrieved May 13, 2011 from http://www.msnbc.msn.com/id/38306235/ns/business-autos/t/car-loan-approval-rates-are-improving/
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