Growth & Jobs | Be prepared before applying for that loan

GARFIELD GOULBOURNE, relationship manager at JN Bank and JN BeWi$e ambassador, is urging loan prospects to arm themselves with the requisite information when applying for a loan, in order to be good candidates.

Goulbourne’s advice comes within the context of Financial Literacy Month being observed in April.

“While savings and investments are avenues to achieve financial goals, for some assets, such as a car and a house, the purchase price is usually a moving figure and one would always be playing catch-up. What then? Is there another way to achieve financial goals? Financial institutions have various credit products and services on offer, available to the public,” he noted.

The JN BeWi$e ambassador, however, cautioned that borrowers should be able to demonstrate that they are credit worthy, as financial institutions will carry out a thorough risk assessment of a debtor before granting a loan.

He noted that when assessing the risk of a potential borrower, lending institutions will consider the following “seven Cs”: capacity, capital, collateral, character, compliance, conditions and confidence.

CAPACITY

Explaining capacity, Goulbourne said, “For retail loans, some persons only think about their income as a determining factor when they seek to borrow. However, what about existing credit obligations and other recurring expenses? As it relates to responsible borrowing, many institutions employ a total debt service ratio (TDSR), which may be up to even 50 per cent.”

He said one’s TDSR is calculated by dividing gross monthly income by total monthly instalment. “For example, if a company has a 50 per cent TDSR threshold and one’s gross income is J$300,000, all your other loans, including the one to be undertaken, should not pass $150,000.”

CAPITAL

Goulbourne said, at times, “risk assessment requires the debtor to put up a percentage of the value of the asset being purchased”. For example, on a seven year-old vehicle, a lender may be hesitant to finance 100 per cent. Therefore, the borrower may be required to put up some of the monies and without this capital injection, the loan may not be granted.

COLLATERAL

In terms of collateral, Goulbourne said there are many occasions, including when borrowing to finance a business, that collateral will be required. Besides unlimited personal guarantee from directors, there are occasions when institutions may be more willing to lend if the physical assets of the business are used as collateral to secure the loan. Options for collateral may be motor vehicles, a house, or even a bill of sale over goods or equipment used in the business.

CHARACTER, COMPLIANCE, CONDITIONS AND CONFIDENCE

He also underscored that one’s credit history is very important when a loan application is being reviewed.

“Capacity or ability to repay is not the only determinant to lend. There are many persons who earn well and have attractive TDSR ratios; however, their credit history shows an unwillingness to repay facilities previously granted to them. This can be a stain on one’s character and may cause institutions to heavily price debt to these folk, or refuse to lend to them,” he stated.

Additionally, Goulbourne declared that deliberate attempts to hide credit obligations may cause institutions to rethink lending to those loan prospects.

He also encouraged applicants to comply with financial institutions’ requirements by providing all the necessary documents to be compliant.

“Often, individuals may not receive the loan because they may refuse to comply with the compliance requests of the financial institution,” he pointed out.