Meet Mike and Narek. These two completely different characters were joined by a common history. Well, both of them collided with the need to buy a longed-for apartment. As it happens in life, a mortgage loan was a key element in achieving your dreams. Will they be known as trustworthy customers in the eyes of the bank? Their credibility and creditworthiness will determine everything.
The first impression – the silhouettes of future borrowers
Mike is a 30-year-old pint, living in a big city, working full-time in a large IT company. His monthly income is fixed and is a multiple of the average remuneration paid in the Polish economy. Due to its situation, many dreams are realized with the use of bank loans, which it repays with a different regularity. Foreign travels, which he is passionate about, did not make him reflect on his own flat. Everything changed when he decided to start a family.
Narek is a resident of a smaller town, a graduate of political science with literary flair. Due to the fact that he is professionally involved in writing texts, his income, although satisfactory, feeds the account at irregular intervals. As a “freelancer” he is employed exclusively on the basis of civil law contracts. Narek is an economical person by nature. To realize its needs, it allocates only previously collected financial resources . Until now, he lived in a single-family home with his parents and sister. He understood, however, that the right moment had come to leave the family nest.
Creditworthiness – the key role of income
According to the definition taken from the Banking Law, “creditworthiness is understood as the ability to repay the loan taken together with interest on dates specified in the contract.” This means that when verifying repayment options, the lender also takes into account the total amount of interest planned. In order to unify the process, banks apply specific criteria for the assessment of future borrowers.
The most important condition, significantly affecting the level of creditworthiness, is the average monthly income. This amount is reduced by the value of monthly liabilities declared by the borrower. The difference resulting from the above operation is called net income. In the simplest terms, it is the amount that stays in the borrower’s pocket each month. As a result, the bank receives information thanks to which it can estimate the safe level of the future loan installment.
In the course of creditworthiness analysis, the source of earning income as well as the place of employment of the borrower is no less important . As regards the origin of income, the most secure contract, and thus the most desirable by the creditor, is an employment contract concluded for an indefinite period. Of course, people employed on the basis of civil law contracts can also apply for a loan or a loan. However, in the assessment of the place of employment, the best employer from the bank’s perspective is the state, then large enterprises with an established position on the market.
When assessing our future borrowers in terms of generated income, Mike is in a much more favorable situation. Not only that he can boast above-average remuneration, but his influence takes place at regular intervals of time, which gave the bank an unquestionable advantage.
On the other hand, Narek’s income, although in the bank’s opinion, is sufficient, appears irregularly. The uncertainty of inflows and the form of employment are definitely to the disadvantage of our borrower. In all of this, however, one can find an element that works in favor of Narek – he derives income from many sources and in case of losing one order, he can quickly replace it with others.
Creditworthiness – organize costs
After verifying the monthly income, the bank reduces the amount received by the costs related to both the expenses for the maintenance of the household and the costs resulting from other financial obligations. It can not be denied that with the increase of customer loads, its chances of getting financing in the amount requested decrease.
Liabilities, loans, insurance premiums, credit cards, and limits can be included in liabilities that are not directly related to the maintenance of the household. Remember that by guaranteeing the obligations of third parties, in the eyes of the bank we are treated equally with the real owner of the loan. This means that when verifying creditworthiness, the bank reduces our income by the amount of installment resulting from the guaranteed debt.
Taking into account the above, the race of our heroes for the dream loan is gaining momentum. Michael’s high income is accompanied by equally high costs. Renting a flat in a large city, car insurance, numerous trips, insurance costs and interest on loans made, net income, which is to cover the future loan installment, drops dramatically. Let’s not forget about the loan that Mike vouched for his best friend. His creditworthiness will also be reduced by this commitment.
Narek as an economical person, can boast of low living costs. Due to the fact that he does not live alone, the costs of maintaining a household are divided into four people. In addition, Narek revealed that the main burden of maintaining the house was taken over by his parents, and his contribution to the monthly bills is symbolic. Narek does not have a car, no financial obligations, and usually spends his annual holidays in the country. Thanks to this, she regularly pays part of the earned money to the account.
Financial credibility is still in the price
Regardless of the net income generated, it is almost certain that the creditor will verify the customer’s current credit history. In order to correctly assess financial credibility, the bank will thoroughly analyze the reports made available by the Credit Information Bureau (BIK). Negative evaluation of the report may be a significant obstacle in the provision of potential financing.
Thanks to the information contained in the report, the financial institution receives a full picture showing the borrower’s actions in repayment of the existing liabilities. In order to facilitate the verification of the banks, BIK grants its clients points enabling the positioning of its financial credibility. The point credit risk assessment system, otherwise known as scoring , works on the basis of comparison of borrower profiles with the profiles of people who have already received a loan.
The client’s financial credibility improves with the increase in the number of points assigned. The way to a high result, which allows the client to be assessed in terms of a reliable borrower, is timely payment of his obligations. Each delay causes the loss of valuable points, and the greater the delay in repayment, the lower the chance for positive verification.
Mike as a dynamically benefiting person, actively uses a bank loan. After all, high income really secures future repayment of incurred debts. The problem stems from the fact that Mike often forgets to pay installments on time. Delays do not result from the deterioration of its financial and economic situation, and from mere distraction. The consequences of this action, however, can be severe. The result of Mike’s free approach to repayment of obligations is the deterioration of his credit history , which may be undermined by his chances of getting a loan.
It would seem that Narek is in a much better position without any credit obligations. Nothing could be more wrong. It happens that clients with dubious credit history are more credible to banks than those who did not use any loans. These people in the eyes of lenders are rated as a big unknown, often not falling within the acceptable risk . Consequently, both of our heroes did not come out of this comparison with a defensive hand.
The first impression is wrong – the conclusion
The story of Mike and Narek leads to a certain reflection. Satisfactory financial and economic situation of the borrower is not always a guarantee of a positive credit decision. Above-average income, less equally high living costs, may not be sufficient in the eyes of the future lender.
Mike, despite BIK’s inaccessible history, received the bank’s consent to incur liabilities, but the terms of the loan did not meet with his approval. Due to the cost of living and untimely debt servicing, the lender offered a high interest rate on the loan and own contribution in the amount of 40% of the property value. Mike, when verifying his financial capabilities, stated that at the moment he simply can not afford another commitment.
Narek, despite lower and irregular incomes, received a positive credit decision that fully met his expectations. The bank’s concerns related to the lack of credit history, Narek softened, proposing a high own contribution. He determined the savings accumulated over the years. In addition, the parents, probably guided by their son’s care, agreed to a loan guarantee. Thanks to this, the bank gained a solid security for repayment of the liability, and our hero the opportunity to leave the family nest soon.