When you are going to apply for a loan, you should know what financial risks the creditors are considering while giving loans so that you can cover all the aspects to become eligible for that loan. There are a number of factors that you should keep in mind to evaluate financial risk like your credit history, capacity to repay the loan, collateral, capital, conditions, character, cash flow and commitment with your work.
- Credit History
Your credit history consists of all the loans you have taken, your creditors’ names and details about your payments. When you are applying for a loan, the creditors use this history to find whether you are eligible for the loan or not. The creditors also use a credit score assigned to you to consider your position for a particular loan. The more the credit score, the more are the chances that you will get the loan. Different creditors may use different criteria to find out your eligibility.
You can improve your credit history by making the payments on time and not becoming a defaulter.
You should consider whether you are having sufficient monthly income and your source of earning is stable to pay back your loan when the payment becomes due. The creditors can take into account your monthly income to come to a decision.
When you evaluate financial risk, you should consider any property or house that you can use as collateral for your loan. The market value of the collateral will determine if you are eligible for the amount of the loan. But if you have already taken a loan on that property than the amount of that loan will be subtracted to get the new value.
What if you lose your job? Will you still be able to pay your loan? That is why the capital is for. Capital is any savings, investments or other assets that you possess and can use to pay your loan if you lose your job or face a loss in the business.
Creditors want to make sure that you are in the right industry and the loan that you are taking will really help you get the purpose. Suppose you are taking the loan for importing a product that is currently banned by your government, in this situation, the loan will not fulfill the purpose. Creditors may also consider other economic, social and environmental conditions.
- Cash Flow
You need to know whether your books are showing enough cash flows to convince the creditors to give you the loan.
This is the thing you want to ask from yourself. Are you committed to your business/job? Do you really intend to work hard enough to repay the loan? If you are committed with your work, you will make full effort to generate profit and repay the loan.
If you take into consideration all these points, you are definitely going to get the loan.