Credit Underwriting

Credit underwriting focuses specifically on lending risk. Lenders often consider several key factors, sometimes summarised as the borrower's character, capacity, capital, collateral and conditions.

Character refers to the borrower's track record of repaying debts, usually shown by their credit history. Capacity is their ability to repay from income or cash flow, often measured with ratios such as debt-to-income. Capital is the borrower's own financial resources or investment in the project. Collateral is any asset pledged as security. Conditions include the purpose of the loan, its terms and the wider economic environment.

For example, when underwriting a 50,000 business loan, a lender might review the company's financial statements, cash flow forecasts, existing debts and the owners' credit histories, and ask for equipment or property as security.

For consumer loans, much of the underwriting is now automated, using credit scores and data models to make fast decisions. Larger or more complex loans still involve detailed analysis by experienced credit officers. Good credit underwriting keeps loan losses low while allowing creditworthy borrowers to access finance.