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What Is the Ability to Repay?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 03 September 2016
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The ability to repay is a phrase that is used in connection with assessing the financial capability of those applying for loans to repay whatever money they seek to borrow. In financial transactions, the ability to repay is very fundamental because it gives the lender greater confidence while lending money to the lendee through the assurance that he or she will be able to pay back the loan without any problem. Laws actually exist to establish a stated guideline that official lenders, such as banks and financial institutions, must adhere to while processing the application of borrowers in order to prevent any unnecessary defaults.

Without such laws and standards to serve as a guide, a lot of people might borrow far more money than they are capable of repaying with negative consequence. For instance, in the housing market, borrowers who obtain mortgages to purchase expensive homes that are beyond their financial capacities may discover they are not able to keep up with the basic monthly mortgages required to pay off the mortgages, leading to foreclosures. To this end, financial institutions must carefully screen loan applicants before they will consider granting them loans. When the applicants do not meet the requirements for the amount of money they requested, they might have to apply a downward review of the amount in order to qualify.

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One of the standards that must be applied by financial institutions in order to determine the ability to repay is an analysis of the current assets of the person borrowing the money. The value of such assets will play a key role in the determination of the individual's ability to repay, since such assets will serve as a collateral that the financial institution may seize in lieu of payment should the person default in payments. Employment status is a consideration, because if the lendee is employed then the lender can be assured that the person has the financial source to make the monthly payments.

Another consideration when assessing the ability to repay is the credit history of the lendee. The analysis of the credit history includes a check of the credit score itself in addition to the history of debt repayment by the individual. Where the individual has been shown to have a desirable credit score as well as a history of timely payments on other debts, this will serve as a plus and as further proof of his or her ability to repay.

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