Lending and Creditworthiness

Introduction:  Explain that this is an exercise to help you think about the idea of “credit worthiness” or the willingness of others to lend you money.  Think of credit worthiness as your “financial reputation.”   Ask students to think about the meanings of a financial reputation.

 1.         Introduce the concepts of cost-benefit analysis and risk to the group.

 Costs – what you give up or perceive you will give up (risk) when a choice is  made.  Costs can be explicit (measurable) or opportunity cost.

 Opportunity cost – the value of the next best alternative when a choice is made.

 Benefit – what you receive that benefits you financially or personally, or satisfies your wants.

 Risk - A situation in which the outcome is uncertain and a range of results, potentially both good and bad, is possible.

 2.         Divide the large group into small groups of 2-3 participants.

 3.         Distribute the “Five Lending Scenarios” handout to the small groups.

 4.         Small groups read their scenarios and decide whether or not they would make the loan.  Groups should provide a rationale for their decision base on the costs and the benefits.

 5.         As the groups report on why they would or would not lend money in each situation, list the key terms or ideas (trust, risk, $ amount, benefits, etc.) on the board or chart pack.

 6.         Briefly discuss the reasons for making loans – such as creditworthiness, risk and reward.

 7.         Introduce the concept of creditworthiness – the “5 Cs” of creditworthiness:

 Character - the honesty and reliability to repay a debt.  Have you used credit before? Do you pay your bills on time?  How long have you lived at your present address or have been employed?

 Capital/Collateral - if you have valuable assets such as real estate, personal property, investments, or savings with which to repay debt if income is unavailable.

 Capacity/Cash Flow - your ability to repay the debt – employment, income.

 8.         Add the ideas “Friendship” and “Compassion” to the discussion.  What role do these personal feelings play in lending decisions?

 Example:  If you have a bad history of repaying loans, who is more likely to lend you money, a bank or your parent?  A bank or a friend?

 9.         Ask: Can banks consider friendship and compassion in their lending decisions?

 10.       Ask: What are the most important considerations when making lending decisions?

 11.       Conclude by reviewing the 5C’s of creditworthiness.