The concept of lending and borrowing is as old as time itself. Regarding finances, while some individuals have more than enough for themselves, others barely have enough to get by. As long as there is this imbalance in finance distribution, there will always be a need to borrow and a desire to lend.
Lending involves giving out a resource on credit with the condition of it being returned upon an agreed period of time. In this case, such resources would be money or any financial asset.
The lender could be an individual, a financial institution, a firm or even a country. Whichever the case may be, the lender, oftentimes, needs a sort of assurance that their resources would be returned to them upon the agreed time.
Certain criteria qualify a borrower to take a loan. Among these are the borrower’s debt-to-income (DTI) ratio which measures the amount of money from their income committed to handling monthly debt service, stable employment, the value of the collateral and actual income.
Credit rating plays a crucial role in lending
Generally, most financial institutions and firms rely more heavily on the credit score of the borrower than the aforementioned criteria.
Consequently, credit scores are by far the biggest factor in determining whether a loan should be granted to a borrower. In a world of financial imbalance where loans are quickly becoming necessary, particularly due to recent economic hardships, individuals, establishments and even governments are expected to keep their credit ratings as favorable as possible.
These ratings or scores can be assigned to individuals, firms…