Should You Consider the Borrower’s Intent or Ability to Pay?
by Lina Martinez
Do you often wonder how lenders, banks, and utility companies approve loans and other subscriptions? What is it in you that signals to your credit card company that they can trust you with an increase in credit limit? What makes them think that you can pay or have the intent to pay them in the first place? For all they know, you could be a criminal who hacked into the system to modify your credit score and history.
Lenders usually have different considerations to make when approving a loan or subscription. They depend on credit score companies to check how you fared in previous loans and bills. These companies compile your credit history. They create a profile of your ability to pay the loans based on your income and other sources of money.
But there has been a movement as of late in the banking industry. Borrowers are not only being judged based on their ability to repay the loans, but also on their intent to pay it in the first place. In India, this came afterbillionaire Vijay Mallyadefaulted on his almost $1 billion loans in 2016 and fled the country. The Economic Times says that this has pushed the interest of judging people’s intent to pay to the forefront of the lending guidelines.
Ability to Pay
The ability to pay is based on your income and credit history. Lenders are going to look at your credit score. They are going to check your current financial status-how deep in debt you are and how much you are earning a month. Where is your income coming from? From retirement? Investments? Inheritance? Salary? Do you have a business? How profitable is your business? Do you have a stable job? What percentage of your salary is your computed monthly amortization?
Theborrower’s ability to pay is quantitative. It is based on science. It is based on numbers and statistics. It is easier for a lender to grant a loan or subscription when there is empirical data to back up this decision.
Intent to Pay
Then, there is the intent to pay. This is a human trait. Credit companies can measure a person’s intent to pay based on their credit history. In India, since 2016, many companies have used a set of questionnaires, specifically targeting a group of borrowers. The questions reflect the needs and challenges of the sector the borrower is a part of. This means that there will be different criteria for educational loans, small- and medium-sized business loans, housing loans, and car loans. The questionnaire was made in such a way that borrowers cannot bluff their way through it.
Lenders say that this formula is around 97% to 98% accurate. They can efficiently collect payments from borrowers using the criteria of the intent to pay. When there is the intent to pay, lenders are more able to recuperate the money they have lent.
The ability of the borrower to pay should be prioritized more than one’s intent to pay. Customers with good intent to pay cannot do so if they don’t have the ability to pay. On the other hand, those with the ability to pay but don’t have the intent can be held legally. A lending business is not just about letting people borrow money. It makes its profit from recovering the money lent to businesses and people, so the ability to pay back the loan is more critical than the intent.