Reference no: EM132775967

Explain why you think this is a good plan for lending money?

Step one is to ask why they need the loan. If it's my money that I'm lending, I want to make sure that I'm not giving someone money to go gamble in Vegas and potentially put them in debt. I would want to make sure that the money is being used for something material that won't immediately lose value; to make sure that the money isn't essentially being wasted. I wouldn't want to throw away money.

Step two is to figure out if that person can pay back the loan. This ties into why they need the loan in the first place. If they are doing something that requires a large amount, it makes sense that instead of paying a lump sum that they would want to break it down into payments that are easier to make. I would look at how much income they have available to make monthly payments. The chances of someone paying back a loan if they live paycheck-to-paycheck is low.

Step three in my underwriting process would be to analyze how trustworthy that person is. I want to know if they've ever borrowed before. If they have, then did they keep up with payments on time? I wouldn't exclude them if they haven't borrowed before, but that would put more weight into my other considerations. This step is the easiest way to get an impression of how this person borrows money.

Step four would be to see if they have any collateral. I left this last because collateral is the last thing I would want to have to take instead of getting my money back. I wouldn't make a decision based solely on collateral, but everything else considered, if they had something of value that could be traded in place of repaying the loan in dollars, then that is more secure than nothing.