When you need financing, you have to enter the mentality of lenders and start juggling banking concepts and terminologies. Knowing how to move in this world is of fundamental importance because you will quickly learn which bank products are best suited to you, how lenders see you and how to exploit your strengths.
Being able to enter the perspective of the bank to which you apply for credit, puts you in a position to better prepare for the needs of the Institute. In essence: if you ask an institution for credit, whatever it is, it is good that you know how that institution “reasons”, what its requests are, what it will look at you and, above all, what will convince it to grant you the credit of you need.
The meaning of creditworthiness
The creditworthiness, thanks to a whole series of analyzes, expresses the customer’s reliability, based on various parameters, reducing the risk on the part of the creditor who provides the loan. In essence, the credit rating is you, seen by the bank.
The bank or finance company will ask, “Does this customer have the potential to pay me back the loan? Will he be able to pay the installments? Are the installments sustainable for him? Are there enough guarantees to provide him with the loan? ”These are all questions behind the concept of creditworthiness. Better yet: these are the questions that creditworthiness must answer.
It’s not just a property issue. There are several parameters that are assessed by the lending institution to ensure that the financing plan will be respected. Obviously, if your “ranking” is not enough, you can forget the financing! At that point, you can opt for a smaller loan or other credit instruments.
For banks and similar institutions, the absolute enemy is the risk of not getting back the funding provided. For this, they have created a whole procedure to calculate your creditworthiness.
Mechanism and calculation of creditworthiness in loans
It is clear that the cost of your financing will be inversely proportional to your creditworthiness: if you have a high score, your financing will cost less. On the other hand, if your score is low, funding will cost you more. Assuming that there are still sufficient parameters to grant you the financing itself.
Some practical examples.
If you have a demonstrable fixed income that has been going on for a long time, you have no particular duties (mortgages, other loans, rents …), you have a higher credit rating than those who have a precarious job and other loans already on your shoulders.
If you own your home and have an income equal to your neighbor, but he is rented and has no real estate, your credit rating will be greater than his.
As you see the concept of creditworthiness is really simple in reality, we could say that it is rather intuitive.
What does the law say?
Obviously, these aspects of credit are well regulated by Italian laws, in order to avoid creating dangerous systems. The standard that makes reference in this field is from 2010 and deals with regulating and reforming Consumer Credit. From this point of view, the Institutes are obliged to carry out a “survey” on the creditworthiness of each citizen or entity that requests a loan, mortgage or loan.
All this attention, including from Italian legislation, is aimed at not creating impaired loans, so as not to send the whole system into crisis. Any loan not repaid, any loan not repaid, any loan not repaid, constitutes a flaw in the entire national credit system. In order to guarantee certain stability of the credit system, and therefore also of the country’s economic-financial system, an attempt is made to protect the system itself from citizens or entities which, according to some analyzes, do not have the capacity to bear the loan.
The rating is a ranking, divided into classes, and each of us, according to the credit institutions, belongs to a class of merit.
- AAA: high security
- AA: security
- A: wide solvency
- BBB: solvency
- BB: vulnerability
- B: high vulnerability
- CCC: risk
- CC: high risk
- C: very high risk
Based on the class in which you place yourself in the ranking that we have just mentioned above, the lender will decide whether to grant you credit and under what conditions.
Some of the criteria for calculating creditworthiness
There are several factors that are considered by credit institutions to evaluate the customer, be it private or business. Without a doubt, one of the main factors is the level of customer indebtedness: would you lend money to an acquaintance already seriously indebted? The bank also tends to consider this figure of primary importance.
Another important parameter in this type of evaluation is the income flows. Which ones does the customer enter? And what is the relationship between income and expenditure? The stability of these entries is another important factor. Institutions cannot consider on the same level a solid flow like that of a salary, perhaps from state work, and an occasional flow from precarious work.
Another important element for assessing creditworthiness is the solubility of previous commitments. If you have already proven insoluble with other institutions, you will be downgraded. Financial and/or capital stability, alternatives to workflows, are an important factor especially if the lender considers them very solid.