Question

Prior to making a credit decision, we should always check the applicant's:

a) Character, capacity, and collateral.
b) Collateral, credit, and cash.
c) Collateral, character, and current assets.
d) Capacity, cash, and collateral.

Answer 1

Before making a credit decision, it is important to check the applicant's character, capacity, and collateral. This involves evaluating their reputation, ability to repay the loan, and providing a valuable asset as security.

Step-by-step explanation:

Prior to making a credit decision, we should always check the applicant's character, capacity, and collateral. This means evaluating the individual's:

• Character: This refers to the borrower's reputation, trustworthiness, and willingness to pay back loans. It includes factors such as their credit history, employment stability, and personal references.
• Capacity: This refers to the borrower's ability to repay the loan. It involves assessing their income, assets, and existing debt obligations. Lenders want to ensure that the borrower's income is sufficient to cover the loan payments.
• Collateral: This refers to something valuable, often property or equipment, that the lender can seize and sell if the borrower fails to repay the loan. Collateral provides security to the lender, reducing the risk of lending.

By considering these three factors, lenders can make an informed credit decision and minimize the risk of default.