Credit Assessment
A credit assessment details the evaluation process of determining an individual or legal entity’s financial health and whether they are able to repay borrowed funds. A credit assessment is performed by looking at the applicant’s financial history, income, assets, liabilities, and credit score.
Credit evaluation, risk assessment
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Examples
A small business applies for a $500,000 loan in order to expand their operations. Before the loan can be approved, the bank in question conducts a credit assessment by looking through the business’ financial records, revenue trends, and debt obligations. In collaboration with the underwriting team, the bank determines that the small business does not represent a risk and approves the loan.
FAQ
What factors are considered in a credit assessment?
A credit assessment typically involves looking at the applicant’s credit score, income level, employment stability, debt status, debt-to-income ratio, and financial history. However, other factors can also be considered - such as the value of any offered collateral and the applicant’s payment history.
What are the goals of a credit assessment?
The goal of a credit assessment is to identify, manage, and minimize risk and ensure that the lender is making a well-informed decision.
How does credit score affect the credit assessment process?
One’s credit score is an important factor when performing a credit assessment as it’s like a snapshot of their creditworthiness. Generally speaking, a higher credit score indicates a lower risk for the financial institution. This can also translate into concrete benefits such as lower interest rates for the borrower.
