How to assess credit risk?

It is easy to take out a loan, it is much more difficult to pay back – this simple rule is extremely true. Especially if you have a good credit history, you can easily make even a big commitment. However, when taking a loan, you must remember that you have to give away all your money. Therefore, in this article you will learn how to assess credit risk. However, let’s start from the basics.

What is credit risk?

credit score

The definition of credit risk can be misleading, especially for young people who are used to how the world works today. Credit risk is considered to be any situation where we are not sure that the customer will pay for the service he has used or the product he has bought. In short, this means that entity A has transferred some value to entity B, but it will receive payment for a certain period of time.

the situation happens when you take a loan, installment product, or non-bank loan. Non-bank loan companies experience significantly higher credit risk. This is due to the fact that by responding to market needs, they use various facilities for their clients. They do this at the cost of less collateral for the loans, which often translates into higher liability costs.

When we touched on the subject of collateral, it is time to raise two dimensions of credit risk:

– Risk of loss or solvency – it concerns the borrower’s future financial situation, e.g. he will lose his job and thus will not be able to repay the entire loan, or will not do it on time.

– Collateral risk – this type of risk defines the risk arising from the risk of the collateral itself adopted to limit this risk.

How do non-bank companies reduce their risk?

How do non-bank companies reduce their risk?

They do this primarily by verifying borrowers. They make sure that he is an honest and responsible person who is aware of the commitment he is making. Seeing the financial problems of the person applying for the loan, they are considering their granting in more detail, because there is a risk of non-repayment of liabilities, and even falling into a spiral of debt.

What is the capital adequacy ratio?

credit loan

When we talk about credit risk, one should also pay attention to the solvency ratio. It applies to both the borrower and the lender.

– The lender must adapt both the size of the loan and the installment amount to the borrower’s abilities. Knowing his monthly income can not give him too high an installment. For example, if a person earns PLN 2,000 a month, it would be absurd to grant him a loan with a monthly installment of PLN 3,000. The DTI indicator is used for this purpose.

– However, the borrower must assess the institution from which he takes the loan. He must pay attention to its solvency, whether the money comes from a legal source. Check out reviews about the lending company, make sure you borrow money from a safe place. You can encounter various scams all the time and it is worth protecting yourself against them.

Why is it worth spending time assessing credit risk?

Some people deny the need to assess credit risk. They believe that only banks should deal with it. Of course, the institutions granting loans and credit assess the safety of positive consideration of a loan or loan application, at the same time it is worth that you also carry out a credit risk analysis on your own. Each loan is a financial liability. If it overloads your budget too much, it won’t end well for you. It is also worth considering how your financial situation will change over the next few years – you need to consider not only your goals and dreams, but also more pessimistic scenarios.

When you decide to take out a loan, remember to evaluate the institution that gives it. Checking opinions, reading the regulations – these simple actions will ensure you that you make a commitment in a safe place.