Essential Elements of Credit for Granting Credit Loans

The elements of credit are related to the activity of temporarily transferring funds. In this case, the process is usually carried out by the creditor to the debtor and several special conditions are required to apply to receive these funds. Investigating further about the elements of credit can be useful for you before applying for a loan.

In this article, we explain in full what all the elements of credit are and what are the elements that are generally considered in the lending process. Let’s look at the explanation we have prepared below!

What is a Credit?

Before moving on to discussing the elements of credit, what is credit? Basically, credit has many different definitions in the world of finance, but credit is most often referred to as a contractual agreement in which the creditor provides a loan in the form of money or something of value to the debtor. In this contract, the debtor is consciously committed to repaying by the agreed terms.

In another sense, credit can also describe the financial health condition of a business or individual who has a very good history of making loans and then paying them off. This group is categorized into debtors who are considered less risky for creditors.

Read also: What is the Difference between Credit and Financing?

The Necessary Elements

After explaining what credit is, we will now invite you to listen to a brief definition of the elements of credit before entering into the discussion. We can conclude that the credit elements are the measuring tools used by creditors in evaluating the eligibility of the debtor or in this case the prospective borrower. Evaluations that are usually carried out include capacity, capital, collateral, and other related matters. Next, let’s read an explanation of these elements one by one.

1. Character

Character element specifically refers to historical data from the credit history of a business or individual. In this context, the reputation or track record of each borrower is evaluated whether it is in accordance with compliance with agreed commitments or not. Creditors also have minimum credit score requirements that are always enforced to assess the debtor’s ability to make repayments. This becomes part of the assessment procedure before it is later approved by the creditor to provide a loan.

Basically, credit scores play a role in determining loan rates and terms. Debtors who have high credit scores are much better and easier to get approved for loans than those with credit scores below the minimum threshold.

2. Capacity

Capacity here is the context regarding the debtor’s ability to repay the loan following the agreed commitment by comparing the ratio of income to debt and the ratio of debt to income.

The creditor performs a careful analysis by calculating the Debt to Income (DTI), which is the total monthly debt, and then dividing it by the monthly gross income. The results of these calculations become a consideration for creditors and debtors, where the lower the debt-to-income (DTI) value, the greater the chance of getting a new loan.

3. Capital

Capital is one of the creditors’ considerations before giving a loan. Debtors who have large capital can reduce the risk of default. In this context, creditors can link capital ownership in many debtor financial activities such as the ability to pay down payments so that it is easier to receive mortgages.

Capital is an important part that is considered by creditors in assessing creditworthiness. Having sufficient and balanced capital to generate income can of course reduce the risk of default and payments can be made smoothly.

Read also: Getting to Know About the Importance of Credit Analysis and its Functions

4. Collateral

Collateral refers to assets used by debtors as collateral for credit. In this case, the guarantee provided can reduce the risk of default so that at any time when unwanted things occur, the creditor can take the guarantee as compensation. The type of collateral can also be a car, house, or other valuable asset.

5. Condition

Creditors also pay attention to conditions related to economic factors, ability to pay, government regulations, and other matters. In addition, consideration is also given to the status of work, position, stability of the job in the future, and how long you have worked at the company. The lender also considers the condition of the loan along with the interest rate and principal amount.

6. Trust

Credit certainly requires trust between the creditor and the debtor. This means that the parties involved in it trust each other and the debtor is committed to repaying under the agreement with the creditor.

7. Timeframe

Thus a series of explanations about the elements of credit which are indicators of assessing the credit worthiness of a business or individual. Of course, the debtor must meet certain predetermined standards to get credit.

In this case, for example, debtors must have a good credit score and also show that they have a good credit history. They also need to have no history of being late with payments and show a low Debt to Income (DTI) level. In addition, they also need to have healthy financial capabilities and be able to repay loans.

Overall, the elements of credit are a very important part of assessing creditworthiness. In addition, it can be useful to support economic activity and increase its growth. By understanding credit and its elements, you can consider everything before applying for credit. To do so, you can rely on the credit analysis service from AdIns to assess your creditworthiness before applying for one. Contact us to know more about this high-end credit assessment service for yourself!