What does 'capacity' refer to in the context of loan repayment?

What does 'capacity' refer to in the context of loan repayment?

• A. The credit score of the borrower
• B. The financial ability to repay a loan with current income
• C. The collateral assets offered for a loan
• D. The interest rate applied to the loan

Answer: (B)

In the context of loan repayment, 'capacity' refers to the borrower's financial ability to repay a loan with their current income. This concept is crucial for lenders when evaluating whether to extend credit to a potential borrower. It assesses the income and ongoing expenses of the borrower to determine if they can afford the monthly payments without experiencing financial strain. Capacity is typically assessed by looking at various financial indicators, such as the borrower's income level, job stability, and existing debt-to-income ratio. A good capacity means that the borrower has sufficient income relative to their debts, making it more likely that they can fulfill the loan obligations over time. While other factors like credit score or collateral assets are important in the loan approval process, they do not directly address the fundamental question of whether the borrower has the available income to make the loan payments. Therefore, the emphasis on capacity focuses solely on the financial capability of the borrower to repay the loan, which is why this option is the correct choice.

In the context of loan repayment, 'capacity' refers to the borrower's financial ability to repay a loan with their current income. This concept is crucial for lenders when evaluating whether to extend credit to a potential borrower. It assesses the income and ongoing expenses of the borrower to determine if they can afford the monthly payments without experiencing financial strain.

Capacity is typically assessed by looking at various financial indicators, such as the borrower's income level, job stability, and existing debt-to-income ratio. A good capacity means that the borrower has sufficient income relative to their debts, making it more likely that they can fulfill the loan obligations over time.

While other factors like credit score or collateral assets are important in the loan approval process, they do not directly address the fundamental question of whether the borrower has the available income to make the loan payments. Therefore, the emphasis on capacity focuses solely on the financial capability of the borrower to repay the loan, which is why this option is the correct choice.