Client creditworthiness - What is it and why should you be interested in it?<

Getting a loan is very easy nowadays. Loans have become a regular part of our lives and need to be given due attention. You can get some types of loans literally on hold. If you are not careful, you will fall into the debt trap very quickly.

Household indebtedness in the Czech Republic is growing. This is also compounded by the coronavirus crisis, where people can lose their regular income and deal with the situation through debt. At the same time, the financial literacy of the majority population is still low.

In practice, it happens that this type of loan does not pull the thorn out of your heel. On the contrary, the debt spiral is easier to spin. However, if you take out a loan with a reputable provider (eg a bank), the whole process will be a bit longer. The bank will first check you thoroughly.

One of the most important and unavoidable things that every bank loan applicant must prove is its creditworthiness. What is it about? What awaits you? And do you have a chance to get a loan at all? Read on, you will find out everything in our article.

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Bonita - What is it and how does it affect your loan application?

When a bank lends money to its clients, it is always exposed to the risk of non-payment. It may also happen that the debtor will not pay on pre-arranged dates and will not rely on his payments. Banks try their best to protect against this risk and eliminate it to a minimum. They will provide the loan only to those clients with whom they evaluate, with a high probability of repaying the loan. In other words, those who are sufficiently creditworthy.

The obligation to determine the creditworthiness of the client is also enshrined in the law, which concerns consumer loans. Therefore, the bank may not provide a loan to an applicant for whom it is clear from the outset that it will not be able to repay its debt. If such a case is proven, in the extreme case the contract may be canceled and the client will return only the principal.

Based on the creditworthiness, it will be decided whether the bank will provide you with a loan or whether your application will be rejected. According to your creditworthiness, the reward for the risk that the bank takes - interest - will also be determined.

In practice, there is no uniform procedure for determining creditworthiness. It is also common for one bank to refuse a loan to you, but you will have no problem obtaining another. The so-called scoring helps banks in deciding whether to grant or refuse a loan.

Scoring - Alpha and omega of your creditworthiness

Scoring is a complex method according to which the bank finds out whether the client is sufficiently creditworthy. It quantifies how much risk a loan applicant poses to a bank. Based on the scoring result, the bank will determine whether the client is sufficiently creditworthy and how high the interest will be appropriate for the given creditworthiness.

On the contrary, the lower the creditworthiness, the higher the risk the bank takes. Therefore, in the case of such a loan, it takes a higher reward, ie. interest.

What can affect creditworthiness?

When assessing a loan application, the bank evaluates a whole range of aspects. Let's take a look at the most important ones together:

Non-financial aspects

The first category is non-financial aspects. This group includes mainly demographic and sociological data.

Financial aspects

Another very important category is the applicant's income. The main thing is that the income is continuous over time and there is a high probability that the applicant will keep it in the future.

Specific rules apply to each type of income. For example, for employees, he must not be on probation at the time of the loan application and his employment must be for an indefinite period.

The applicant's regular expenses are on the second scale. Current expenses include, for example, housing rent, insurance payments, building savings contributions, alimony, etc. A separate chapter for assessing creditworthiness is debts that the person in question already repays. Credit limits on credit cards or overdrafts also play an important role.

Credit registries

If you already have a loan, this does not necessarily mean that you will not receive another loan. More important than the loan itself is your credit history and the fact that you repay regularly. If you have already shown in the past that you are willing and able to meet your obligations, this fact can bring you positive points in assessing creditworthiness.

Credit registries are used to verify credit history. Banks have the opportunity to check the loan applicant in these registers and assess the payment morale of the applicant not only in relation to loans, but also to mobile operators or energy suppliers.

There are 3 registries in the Czech Republic that banks can use:

Living wage or what you can't do without

An important aspect for assessing creditworthiness is also the subsistence level. Don't be fooled, this is not a living wage set nationwide, but it is an individual living wage that you can't do without to ensure your own basic living needs.

The subsistence level will be calculated by the bank and deducted from the reported income. The amount of the subsistence minimum is different for each applicant and depends on the number of persons in the common household, on the number of children that the applicant must support, etc.

How to improve your creditworthiness and what to do if it is not sufficient?

There are really a lot of factors that affect creditworthiness. In practice, your creditworthiness may not be sufficient. Fortunately, in these cases, banks offer ways to resolve such a situation.

A word in conclusion

You will find out what conditions the bank offers you, what amount of the loan you will reach and at what interest. In addition, you will have the opportunity to work on your creditworthiness before you actually apply for a loan. Thanks to timely preparation, you can save considerable amounts on interest.

The level of creditworthiness testing will also depend on how long you take the loan. The creditworthiness of loans in the order of a few thousand for bridging the pay period will be assessed differently from a mortgage in the order of several million in the order of decades. However, it is important to carefully consider whether you really need it for each loan, to study the conditions under which the bank will lend you money, and above all to be sure that you will be able to repay it. Remember! Each bank has its own method of assessing the creditworthiness of the client.