What Motivates Creditors?

Have you ever wondered what drives creditors to make the decisions they do? Mostly, they think about not losing money, which makes sense. If you were lending someone money, you would want it back, right? In the world of lending many things drive how creditors interact with consumers and decide whether they should loan them money. Read on to understand how creditors make decisions and the driving forces behind their practices.

In short, what drives creditors’ decisions is:

  • Repayment of debt
  • Minimising risk of default
  • What type of credit it is
  • Your relationship with the creditor
  • Market conditions

Repayment of debt and minimising risk of default

People lend out money with the expectation that it will be repaid. When it is not, creditors have made a loss, which affects their business, profits, and how they pay their employees. Families’ livelihoods depend on these profits. They also want the interest that they charge, which is how they make a profit. This is why some creditors enlist debt collectors to hound you for the money.

It’s also why creditors are such sticklers for good credit scores and payment histories. Having a judgment, default, or even debt review flag on your report signals that you are responsible for the money. These things signal that you’re a high risk for default (not paying them back).

Type of credit

Lenders might have different priorities depending on the kind of credit they issue. For example, a company that loans money for mortgages might prioritise the collection of collateral. In contrast, an unsecured loan company would rather focus on credit score.

Secured loans

Secured loans work in tandem with something called collateral– that’s something the lender can repossess if you default (don’t pay them back). Collateral could be a house, car, or any other asset of high value.

Creditor’s relationship with you

A lot of business is about trust and relationships. If you have a history of paying back your debts and are in good standing with a particular lender, you’re more likely to be granted credit.

Relationship with the public

Some lenders, like credit unions, might prioritise public image over profit, leading them to offer lower interest rates than say, banks. They’d probably also participate in programs that offer financial literacy.

Market conditions

If the lending market is quite competitive, creditors are more likely to offer lower or prime interest rates, as well as terms more favourable to consumers than them, just to make a profit. Conversely, when the market is tight, creditors are more likely to be more selective and have stricter requirements for whom they offer loans.

What Motivates Creditors?

In conclusion, the things that affect how creditors make decisions are: repayment of debt, reducing risk of default, type of credit, relationships with said consumers and the public, and market conditions.

If you think you’re unlikely to be lent money because of the state of your credit, get in touch with Cape Town Legal Consultants. We’re Cape Town‘s experts in credit clearance and can get debt review, judgments, and other bad marks off your history.