Lending - An Art and a Science

Sep 10, 2021Lending

Underwriters, both consumer and commercial, look at qualitative and quantitative factors when reviewing loan requests. That’s why lending is an art and a science.   

Quantitative Qualitative
  • Credit Score
  • Debt to income ratio (consumer)
  • Debt service coverage ratio (commercial)
  • Loan to value
  • General character observation
  • Behavior, emotions, experience 
  • Collateral location

The 5 C’s of Credit is a common lending term creditors use when considering loan requests. The commercial team uses this philosophy in all of our commercial loan considerations

  1. Capacity: Repayment capacity – the amount of cash (after expenses) that is available to service the proposed debt payment.
    • Commercial uses the debt service coverage ratio (DSCR) as its primary metric, and generally look for this to be ≥ 1.25:1
    • Consumer primarily uses debt to income ratio (DTI) as its primary metric, and generally like to see DTI of ≤ 45% or .45/1
  2. Character: Repayment history (credit report and credit score) is a good indicator of a person’s willingness to repay. Other considerations of character are reputation, behavioral experiences, education, employment history, and other areas to determine stability and creditworthiness.
  3. Capital: How much liquidity does the business or individual have? How much cash will the applicant put down towards the underlying finance request? Think Loan-to-value (skin in the game)…
  4. Collateral: The underlying asset (car, home, commercial building, Accounts Receivable, etc.) being considered as security for the loan. We consider the quality, location, useful life, and resale value of the asset to aid in risk mitigation and protect the CU from loan losses in the event of foreclosure.
  5. Conditions: The general terms and purpose of the loan – loan amount, interest rate, and term of the loan, as well as the general economic and industry conditions that could impact the borrower.

Importance of Establishing and Maintaining Strong Personal Credit

I cannot OVER-EMPHASIZE the importance of establishing and maintaining good credit – as it relates to credit score/reports. Credit reports are used in so many areas of life and can be of tremendous benefit or detriment depending on the contents.

Primary factors that comprise your score are:

  1. Payment history
  2. Credit Usage - % of usage to availability should be < 30%
  3. Total balances
  4. Credit Age
  5. Recent Credit – Too many inquiries in a short amount of time adversely impact your score

Examples of who uses credit reports to make decisions:

  1. Financial institutions
  2. Employers
  3. Landlords

Once credit is established, it is wise to know where your score is at on a regular basis. Most financial institutions have resources available via online banking platforms that track and updates your score(s) free of cost.

In conclusion, having a better understanding of what creditors are looking at and looking for when considering loan requests may be useful in future conversations with members or friends and family. 


Bobby Gale

Bobby Gale

Director of Commercial Services | HAPO Community Credit Union

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Building Credit / Debt / Commercial / Loans