The determinants of consumer borrowing

Consumers represent one of the largest groups of borrowers in the financial system. Yet individual consumers differ widely in their use of credit and their attitudes toward borrowing money. What factors appear to influence the volume of borrowing carried out by households? Gross income is a common standard in this instance. For younger borrowers, without substantial assets to serve as collect for a loan, a cosigner may be sought whose assets and financial standing represent more adequate security. The duration of employment of the borrower is often a cortical factor, and many institutions will deny a loan request if the customer has been employed at his or her present job for less than a year.
The past payment record of a customer usually is the key indicator of character and the likelihood that the loan will be repaid in timely fashion. Many lenders refuse to make loans to those consumers who evidence "pyramiding of debt"-that is, borrowing from one financial institution to pay another. Evidence of sloppy money handling, such as unusually large balances carried on charge accounts or a heavy burden of installment payments, is regarded as a negative factor in the loan decision. Loan officers are particularly alert to evidence of a lack of credit integrity as reflected in frequent late payments or actual default on past loans. The character of the borrower is the single-most-important issue in the decision to grant or deny a consumer loan. Regardless of the strength of the borrower's financial position, if the customer lacks the willingness to repay his or her debt, then the lender has made a bad loan.
Most lenders feel that those who own valuable property such as land, buildings, or marketable securities are more reliable than those who do not own such property, especially if the property itself is pledged to secure the loan. For example, homeowners are usually considered to be better risks than those who rent. Moreover, borrowers´ chances of getting a loan usually are better if they do other business (such as maintain a deposit) with the lending institution. If more than one member of the family works, this is often viewed as a more-favorable factor than if the family depends upon one breadwinner who may become ill, die, or simply lose his or her job. Having a telephone at home is another positive factor in evaluating a loan application, since the telephone gives the lender an inexpensive way to contact the borrower. One way to lower the cost of a loan is for the consumer to pledge a bank deposit, marketable securities, or other liquid assets behind the loan. The disadvantage here is that such a pledge "ties up" the asset pledged as security until the loan is repaid.