What is Credit Analysis? Definition of Credit Analysis, Credit Analysis Meaning and Concept
Analysis of credit (credit analysis) is a report to determine approval or denial of a loan. The creditor evaluates the probability that the money granted will be returned, considering both quantitative and qualitative aspects.
This type of analysis is key for financial institutions. Only by using the right methodology can you ensure that the bank's business is sustainable.
Otherwise, if the financial institution were to massively extend credits to high-risk subjects, the delinquency rates could rise. Consequently, the institution could even go bankrupt.
Elements of credit analysis
There are several elements to consider in credit analysis. They stand out from them:
- Account statements: They are the records of the last movements of the applicant in his / her bank account (s), both inflows and outflows of money.
- Proof of income: Recent documents (pay stubs, receipts for fees, etc.) are usually requested to show that the user has received income, for example, in the last three months.
- Guarantee : The lender normally asks for the statement and financial information of a third person who agrees to repay the credit in case the applicant does not do so.
- Guarantee : It is a confiscable asset by the creditor in case of non-payment. For example, for mortgages, the collateral is the same real estate. If the client does not cancel the agreed installments, the bank takes possession of the home.
The credit history records the prior behavior of the person as a debtor. Therefore, it is a fundamental part of credit analysis.
The provider entity uses information from the credit bureaus, institutions that collect data from the entire financial system. In this way, it can be verified if the applicant has a delay in the repayment of a loan.
The better the behavior of the debtor has been, the latter will be able to access better credit conditions: lower interest rates, larger amounts of loans, more personalized services, among others.
However, it is worth clarifying that not only the applicant's past is analyzed, but its potential to generate greater income in the future. This is key, for example, for credits aimed at students.