What are the four primary factors that lenders consider when determining whether to approve a loan?

The four primary factors that lenders consider when determining whether to approve a loan are indeed Credit, Capacity, Capital, and Collateral.

Credit refers to the borrower’s credit history and credit score, which provide insights into their past borrowing behavior and repayment reliability. Lenders use this information to assess the risk associated with lending to the borrower.

Capacity relates to the borrower’s ability to repay the loan, usually evaluated through their debt-to-income ratio. This metric considers the borrower’s income against their existing debt obligations, helping lenders understand whether the borrower can afford to take on additional debt.

Capital encompasses the borrower’s assets and savings, which serve as an additional security for the lender. A borrower with substantial capital shows financial stability and the ability to handle unforeseen expenses or issues that may arise during the repayment period.

Collateral is the asset that secures the loan, which in the case of a mortgage would typically be the property being purchased. This factor ensures that if the borrower defaults on the loan, the lender has a means to recover their funds by repossessing and selling the collateral.

The other answer choices focus on different aspects of financial assessment but do not encompass the core factors lenders prioritize when making lending decisions. Understanding these four factors provides a foundational knowledge essential for navigating