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When and why do you need a credit check?

Why bother doing a credit check? Our article explains how it may affect your ability to borrow money and apply for housing, among other things.

Solvency is an indicator of whether an organization or a person (legal entity or individual) can repay loans on schedule and in full.

no credit check car dealersIt is established by considering several factors which differ between individuals and organizations.

Credit assessment helps to understand how much money can be lent to a particular client and for which period of time.

Credit assessment is the analysis of a huge amount of information and documents. Nowadays, most of the information on each borrower is presented in common banking databases.

In the past, it used to take many papers and a lot of time to check a borrower’s solvency. Today, the programs created for this purpose help calculate the necessary indicators in record time.

If you do not know why is a credit check required for postpaid service, we recommend you read the article in detail. There are reliable answers to all questions.

How to assess creditworthiness

We should dwell on the system of analyzing creditworthiness in more detail.

In general, no single correct assessment method will lead to the most accurate information, and every organization has its own algorithms. However, all methods can be classified and divided into:

  1. Scoring algorithms of evaluation – implies the use of factual and quantitative analysis. The borrowers are conditionally divided into three rating groups: “positive”, “neutral” and “negative”. An indicator assigned to each client is calculated through algorithms, after which he falls into a particular group.
  2. Expert evaluation – specialists gather and calculate the indicators of the borrower, study his personal qualities and characteristics, and analyze his credit history. In other words, a personalized decision is made for each person who applied for financial assistance based on statistics on his finances and other criteria.
  3. There is a general pattern in the evaluation of the results of research by banks: the higher the amount of the loan and the size of the monthly payment, the longer the term of the loan, and the deeper they check the person for its ability to repay everything on time.

Modern credit risk calculation systems consider the macroeconomic situation in the world at a given time. We are discussing the risks of default and the onset of an economic crisis. Special computer programs are used for this purpose.

Is it necessary to carry out a creditworthiness assessment

Financial organizations will not lend money to citizens and companies that cannot make payments and close debts on time.

Making loans at an annual interest rate is what such organizations make money from. They do not allow themselves to rely on those who will not repay the money.

Proper risk analysis helps the financial offices and the borrower in the following ways:

  1. If the citizen cannot ensure repayment, it is not worth giving him funds. In this case, denying a loan is a kind of help. Today, it is easier for many citizens to go to a financial organization and take a loan for purchase than to put the money situation in order or to learn financial literacy. Regulation of the process by the bank minimizes the number of debtors.
  2. If a person has proved his solvency and willingness to pay the loan, but there is little information on him, and expert risk assessment does not say for sure that he will pay all the borrowed money on time and in full, the organization offers terms more favorable for itself than for the borrower. The bank does this to minimize the risk of losing its own money as much as possible.

Those who loan money use the funds, and financial institutions earn interest on using the resources. Nobody stays on the losing side.

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