Collateral, which is the value of your personal possessions and/or property, is another factor considered by lenders and creditors. Possessions may include such things as personal possessions of value, an automobile that is paid for, and real estate holdings. Even though these items would need to be sold or liquidated, their value may be considered as a factor in determining the strength of a loan application.
For example, if someone is seeking to borrow money and has very few assets (cash reserves) but recently inherited their grandfather’s house and is willing to offer the property as collateral, they may be a better credit risk. This is because despite the fact that the loan applicant may have limited cash reserves, the possession of the real estate may make the application very strong and thus a better credit risk.
The term commonly used for this type of situation is called “compensating factors.” If an applicant is very strong in one area, yet weak in another, compensating factors may be considered. Another example of a compensating factor may be having limited investments, but a high income.
Relative to a home mortgage approval, a large down payment (for example, more than 20%) may be a compensating factor for some credit imperfections.
For example, if someone is seeking to borrow money and has very few assets (cash reserves) but recently inherited their grandfather’s house and is willing to offer the property as collateral, they may be a better credit risk. This is because despite the fact that the loan applicant may have limited cash reserves, the possession of the real estate may make the application very strong and thus a better credit risk.
The term commonly used for this type of situation is called “compensating factors.” If an applicant is very strong in one area, yet weak in another, compensating factors may be considered. Another example of a compensating factor may be having limited investments, but a high income.
Relative to a home mortgage approval, a large down payment (for example, more than 20%) may be a compensating factor for some credit imperfections.
