Credit Application Project Essay

Risk is inherent in all characteristics of a commercial procedure; equally, for banks and financial organizations, credit risk is a necessary issue that requires handling. Credit risk is the likelihood that a borrower will fall short in meeting his or her responsibilities in conformity with contracted terms. Credit risk, consequently, occurs from the bank’s transactions with or loaning to business, persons, and other financial establishments. This area of credit evaluation and measurement is enormous and every new account fronts new tests. When an application is obtain, what does a financier searches for in it? Answer to this is not merely comprehensive but also multifaceted. Consequently, when an application project is present to the financier, he re-examines the project to convince himself about the accuracy of the different details and computations and suitability of the different suppositions and projections. The perspective of a financier while assessing the project; is to determine the feasibility of the project with an outlook of guaranteeing the reimbursement of the loaner’s responsibility under the bank’s term assistance.
This case is about Neil Harris who wants to borrow a loan jointly with his wife Helen Harris. They want to borrow an unsecured loan of 24,000 dollars .He is an office manager with a firm known as Franklin Industries, where he has worked for 2years. His wife is also an employee with the same industry as a market director for 4 months. They both have accounts with the same bank AM South and have three dependants, one an adult and two minors. They previously have been declaring bankrupt with four ongoing debts of which they are paying. These include; mortgage of 150,000 at a rate of 1100 per month and paying for a Nissan at 5,000 at the rate of 175 per month. They are also paying for a MasterCard worth 500 at the rate of 50 per month. As well as repaying a loan of 4200 at the rate of 150 per month. They have also offered 2003 Chevy Theo as collateral for the loan.
As a loan investigator, the best way to analyze this credit application is by using the 5c’s of credit. These include character, capacity, capital, collateral, conditions and in general credit scoring. In terms of character, we will look at the stability, personal characteristic, and credit history of the joint applicants. Neil Harris has worked previously as a sales person for three years, therefore, by currently working as an office manager entails a promotion. He has worked in this position for 2years. Using the issue of promotion and the length of time he has worked to analyze his character is appropriate in that, it shows and portrays him as a hardworking responsible individual. Therefore, there is no doubt he will not repay the loan. In addition, by his wife starting work as a marketing director, thus, moving from being a homemaker increases their joint income consequently placing them both as stable. Looking at their credit history, they have four main credits, which they are currently paying. They include a home mortgage repayment of 1100 per month and a loan repayment of 150 per month. In addition, they are paying for a car (Nissan) at the rate of 175 per month and a MasterCard at 50 per month. These give a total of 1475 per month. The credit structure is affordable to them even if they are granted the loan at the rate of 540 per month. These will total their credit payment to 2015, which if compared to the total income of 4250 is payable.
The second of the 5c’s is capacity. This analysis involves looking the debt to income ratio and ability to repay. According to the information provided the total credit debt amounts to 1475.If granted the loan the total sum of debts would amount to 2015 dollars. Compared to the total income of 4250 the ratio is about 1:2.The ratio is appropriate and sufficient and shows their ability to repay the loan if granted.
The third is capital. The Harris family has enough capital to repay the loan in case of a default in the repayment of the loan. Apart from the Nissan, they have 1990 truck worth 250, household items worth 10,000 and the 2003 Chevy Tahoe worth 36,000. Both their statements show a nice balance of assets against liability. These facts show that they have enough assets to aid them in getting a loan .In other words they have the ability to repay the loan if their constant supply of income is cutting.
The 4th c stands for collateral. They have provided a 2003 Chevy Theo as collateral, which has a market value of 36000.This is sufficient to cover the repayment in case of a default in the repayment.
The fifth c is Condition. It is a general assessment of the circumstances neighboring the loan as well as overall economic ambiance at the instance the loan is applied and the general reason of the loan. Assuming the economic situations of the country is stable then the economic condition of Neil Harris is satisfactory. Together with his wife, they have managed to increase their overall income. He is now an office manager, a superior post, while his wife has started working as she was previously a housewife. The reason of the loan is also a significant feature. The reasons surrounding the loan application are more than satisfactory. Although we have not been given the whole information on this.
Credit scoring is another form of evaluating a loan application. This statistical examination of Neil Harris’ credit dossiers attempts to characterize his creditworthiness. A credit score is principally based on credit report information characteristically obtained from credit agencies. From the information provided, Neil Harris has a both a checking and savings account, this is a strength and according to the credit report, the score is 36. There are also paying for a home (mortgage) which gives him a score of 14. Other scores as per the credit score sheet are Time with present employer (2 years), a score of 12, Time at current address (1 year) a score of eight. These figures give a total of 70, however, from the credit reporting section, it found out that the couple had once been declared bankrupt. This negates the total score by 15, thus a score of 55.
The Capacity to repay a loan is the most noteworthy of the five aspects. Both Mr and Mrs. Harris have shown their cash flow as seen in their financial statements. The payment history on existing credit associations both personal and business has proven their indication that can be deeming as a good prospect payment routine. In terms of capital, both Mr and Mrs Harris have contributed from their assets and have assumed individual monetary risk to institute a business prior to enquiring for a loan. (Capital is the money one has endowed in a business and it acts as a sign of how much one has put at risk and may lose should the venture fail). Collateral is an extra structure of security one can offer the bank for a loan. By offering the Chevy Tahoe, The Harris Family has pledged the asset as a security with the agreement that it shall be the reimbursement basis in case they cannot reimburse the loan. As having a consignor in form of his wife, Mr. Harris has a strong guarantor.
In addition, character is the universal notion one makes on the bank. or investor. From the information relayed, it is apparent that Mr. Harris has portrayed himself as an adequately reliable individual able to reimburse the loan if given. This can be explained from the financial statements, length of work, and professionalism on his type of work and the promotion.
From the above analysis, it is evident that there is more strength attributed to Mr. Harris than weaknesses. It is also apparent that he is capable of repaying the loan and in good time. Anyway, if he cannot do so, the collateral provided is more than sufficient to repay the loan if repayment is defaulted. Therefore, the loan is granted.