The Act of 29 August 1997 – Banking Law defines the creditworthiness as follows: “Creditworthiness is understood as the ability to repay the loan taken together with interest on dates specified in the contract.”
The basic criterion for the assessment
It is the amount of income in relation to the planned amount of debt and the time of its repayment. This income (taking into account all sources recognized by the bank) must be stable and high enough to divide the loan amount into the appropriate number of installments increased by loan costs (interest, commission, insurance). The borrower has enough funds to function without deteriorating the quality of life.
The same client may therefore have creditworthiness in the case of a loan planned for 10 years, but no longer meet the criteria in the case of a 5-year repayment period. This is not the only parameter to assess creditworthiness – there are also other equally important elements such as permanent financial liabilities: installments in other loan institutions, fixed fees, and – in the case of natural persons – maintenance payments, average maintenance costs in a given period and the number of people dependent on the borrower. Even with huge incomes at very high fixed loads, we can be considered by the bank as financially inefficient.
How is the creditworthiness assessed?
In order to carry out such a calculation for a natural person, it is worth using existing internet calculators created both by banking institutions and independent entities. Their algorithms may provide for average expenses that a person applying for a loan or credit must pay monthly, in other words, the application is able to predict how much the borrower must have for life after deducting the potential loan installment from the income. There are also those in which detailed and reliable calculations fall into specific question forms, eg about age, number of dependents, current indebtedness, job seniority or type of contract.
Regardless of the quality of independent calculations, the bank in which the client applies for a loan will make a calculation according to his own criteria (credit analysis). He may refuse to cooperate even when mathematical calculations result in a high capacity but, for example, the bank will take into account the previous bad (or no) credit history. The latter is often taken into account as an element of creditworthiness.
Taking into account the above, the bank may also propose a shorter repayment date, a smaller loan amount or higher commission costs. Not always creditworthiness ultimately determines the acceptance of the application – in the case of a customer with no creditworthiness, the bank, for example, can grant a loan by establishing a special type of security on the borrower’s assets.