What term describes the financial ability to repay a loan?

What term describes the financial ability to repay a loan?

• A. Creditworthiness
• B. Capacity
• C. Liquidity
• D. Collateral

Answer: (B)

The term that describes the financial ability to repay a loan is accurately represented as capacity. This refers specifically to a borrower’s ability to repay debt, which is evaluated based on their income, employment status, and existing financial obligations. Lenders assess capacity by analyzing a borrower’s financial circumstances to determine if they have sufficient income or resources to meet loan repayments. In discussions regarding borrowing, capacity is a crucial component of the “3 Cs of credit,” which also include credit history and capital. Understanding capacity helps lenders gauge the risk associated with lending money and underlines the importance of evaluating a borrower’s financial stability. While creditworthiness relates to the reliability of a borrower based on their credit history, it encompasses more than just the ability to repay; it also takes into account past financial behaviors. Liquidity refers to the ease with which assets can be converted to cash and does not directly measure a person’s ability to service debt. Collateral involves the assets pledged against a loan but is not a measure of financial ability; it instead serves as security for the lender in case of default.

The term that describes the financial ability to repay a loan is accurately represented as capacity. This refers specifically to a borrower’s ability to repay debt, which is evaluated based on their income, employment status, and existing financial obligations. Lenders assess capacity by analyzing a borrower’s financial circumstances to determine if they have sufficient income or resources to meet loan repayments.

In discussions regarding borrowing, capacity is a crucial component of the “3 Cs of credit,” which also include credit history and capital. Understanding capacity helps lenders gauge the risk associated with lending money and underlines the importance of evaluating a borrower’s financial stability.

While creditworthiness relates to the reliability of a borrower based on their credit history, it encompasses more than just the ability to repay; it also takes into account past financial behaviors. Liquidity refers to the ease with which assets can be converted to cash and does not directly measure a person’s ability to service debt. Collateral involves the assets pledged against a loan but is not a measure of financial ability; it instead serves as security for the lender in case of default.