Credit – Character versus Capacity to repay

Does character matter when a loan is being reviewed by a lender, or should capacity to repay be the only issue?

Two of the tenants traditional lenders teach their lending staff is capacity to repay, and character, also referred to as willingness to repay.   Capacity is determined by credit, cash flow, length of employment, or time in business for a business, debt to income ratio, financials, possibly bank statements, and the amount of the new debt to be serviced.

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Why is character an issue in lending?   When lenders say character, they more so mean willingness to repay.    There are numerous instances in which the borrower is able to repay but chooses not to for a variety of reasons, including:

– Prioritizing debt accounts.  The debt holder has limited funds and prioritizes what is most important to repay.   Some lenders       will lose out is this decision making process by borrowers.

– Unwillingness to continue paying on accounts that are joint with    someone else, most often a spouse.   Often, one of the signers            signs more so for the benefit of the other person to obtain                  rather than for themselves.     Over time, due to divorce or              a deterioration in the relationship between the parties, the signer    who had just signed in order for the other party to obtain financing  is no longer enthusiastic about paying, or outright unwilling.

– Partners.   Often partners in a business signer on behalf of each      other.   If the business dissolves, or even if the business continues    but the relationship deteriorates, one party may discontinue            paying on a debt, placing the payment of the debt in jeopardy.

-Child Support.    In some cases, individuals pay mortgage, rent,         car notes and credit cards, even vacations, but not child support.     This is considered a character issue.

– Lack of ongoing perceived value of the debt.   A  good example is      vacations.    Someone who has borrowed for a vacation no longer      receives any benefit of the vacation after it is over but is now           obliged to pay the debt.

For a variety of reasons, many detailed above, character, or willingness to repay is a significant consideration by lenders.

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