How a Lender Decides Whether to Trust You

Borrowing, advice, often, comes, as, a, list, of, rules., But, it, makes, more, sense, if, you, view, it, from, the, lender's, side:, they're, buying, future, payments, from, someone, they, don’t, know., The, interest, rate, is, simply, the, cost, for, the, risk, that, those, payments, might, not, come, through.

Lenders, look, at, a, borrower, through, the, five, Cs, of, credit., Character, is, key., It’s, all, about, the, borrower’s, repayment, history., Capacity, matters, too., This, refers, to, income, compared, to, existing, debts,, showing, the, ability, to, make, payments., Capital, is, the, borrower’s, own, money, in, the, deal,, like, a, down, payment., Collateral, is, an, asset, the, lender, can, claim, if, payments, stop., Conditions, involve, what, the, loan, is, for, and, the, economic, climate.

Capital, and, collateral, serve, different, purposes, and, often, get, mixed, up., Collateral, protects, the, lender's, interests, if, things, go, south., Capital, influences, the, borrower’s, motivation:, a, person, with, $40,000, in, a, house, acts, differently, than, someone, with, nothing, invested., Lenders, value, both, for, different, reasons.

This, explains, why, a, secured, loan, has, a, lower, rate, than, an, unsecured, one., A, mortgage, is, backed, by, the, house,, while, a, credit, card, has, no, collateral., The, difference, in, rates, isn’t, about, morality;, it, reflects, the, lender's, recovery, position., That’s, also, why, credit, card, APRs, are, so, high:, there’s, no, collateral,, and, borrowers, can, max, out, their, balance, anytime.

A, credit, score, simplifies, much, of, this, into, one, number, for, quicker, decisions., It, doesn’t, judge, worth., Instead,, it, estimates, default, risk, based, on, repayment, history,, amounts, owed,, credit, history, length,, credit, mix,, and, recent, applications.