The Three ‘C’s


Have you ever wondered how a lender decides whether to approve a loan or not. Well, you’d be right if you thought one of their primary concerns is that a borrower has a regular income sufficient to repay the loan, but is that the only thing they consider?

The short answer is ‘No’. Although most lenders now use computer software that uses mathematical algorithms to compute whether a borrower is a good risk or not, assessment of loan approvals are still fundamentally based on some key principles, which they then verify by collecting additional information from you. These principles can be summarised as follows –


Cashflow. ie, can you repay any loan that you are given?

  1. Do you have a regular / reliable income and what is it?

  2. If employed, on what basis (permanent, contract, casual etc)?

  3. How long have you been employed? Are you on probation?

  4. Do you receive any other types of income?

  5. What are your monthly living expenses? What other regular commitments do you have ?

Character. ie, are you likely to repay any loan that you are given? This can be trickier to ascertain given that lenders probably don’t know you, so they work on the basis that ‘past performance is an indicator of future performance’. They will assess this by reviewing the following from you –

  1. If you’re already a customer of the lender, how have you conducted your accounts with them in the past?

  2. Savings/Cheque accounts – do you have any? Have you have ever been overdrawn on your bank accounts?

  3. Credit cards & other loans – have you made your regular repayments on time in the past? Are you currently up to date with your credit card & loan repayments? Are there any late fees or penalty interest charges on your statements?

  4. What is your credit score? Do you have any defaults on your credit file and what are they?

Collateral. ie, what security are you offering to secure the loan?

  1. Are you contributing any cash up front to the purchase? ie, the more equity you contribute, the more attractive the deal to the lender.

  2. If purchasing real estate, what type of property is it? Is it established, to be constructed or an ‘off the plan’ purchase?

  3. What will the property be used for and where is it located? ie, investment, owner occupied, first home owners, holiday home, serviced apartment etc. This is important as lenders have limits as to how much they will lend (or in fact whether they will lend) dependent on the proposed use & location of the property.

  4. What is the property worth? ie, the lender will conduct a valuation to make sure that the property is worth what you or your contract of sale says it is worth.

Lenders consider all of the above on a ‘big picture’ basis and not any one aspect in isolation. So, if there have been issues with the above, then your Finance Broker can help to explain & mitigate the situation to the lender. Also, it is good to remember that every lender has different policies and a good Finance Broker is a great asset to help find the most appropriate lender for your situation.