What is Credit Review? Purposes of Annual Credit Review

Credit review which also goes by the name account monitoring is an annual assessment. That is conducted by lenders and creditors on clients. With an outstanding loan or credit lines. Creditors like banks, credit bureaus, and financial services companies carry out assessments. On both persons and corporate customers in order to see their risk level. As well as their ability to honor credit obligations. It is this review, that a creditor can use to make choices. On whether or not to cease any existing credit with the customer.

What is Credit Review? Purposes of Annual Credit Review

When it comes to the lending industry, credit review takes the form of an account monitoring, where the lender reviews current loans on a periodic basis. It can either be quarterly or otherwise. The aim of the review is to ensure that all the loans were provided according to the standards and rules. The lender also confirms the creditworthiness of the borrowers with credit lines.

What are the Purposes of Annual Credit Review?

Here are the main reasons why lenders and creditors carry out an annual credit review:

To Evaluate the Creditworthiness of Potential Borrowers

An annual credit review can be used by a creditor as a tool. For assessing a customer’s ability to make principal and interest payments on time. For existing customers with outstanding loans. The creditor is interested in knowing if they still meet the loan demands. As well as the lending criteria and if their financial circumstances could have changed.

It is these findings that help the creditor in reviewing the credit lines. With the aim of increasing or reducing the amount available to the customer(s). Here, the creditor can also assess the financial strength of new borrowers. In order to determine their ability to pay back the loan amount. As well as the interest in a timely manner.

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It is the findings of the evaluations. That determines if the lender will approve or reject the loan application.

To Reveal Negative Data about Borrowers

An annual credit review can also be used by a creditor to scrutinize a borrower’s financial status. This is to find out negative information that relates to their previous credit history. If a lender discovers that a borrower with an outstanding loan has a history of bankruptcy filings, monetary judgments, foreclosures, etc. The credit line may need to be re-evaluated to reflect the new information.

To Examine Prospective Borrower’s Credit History

Credit reviews can also be conducted by creditors with the aim of examining the credit history of a borrower. This is to know their track record in terms of the amount of credit they have borrowed in the past, payment patterns, history of defaults and foreclosures, etc. The credit report can be obtained by the lender from one of the three main credit bureaus (i.e.) TransUnion, Experian, and Equifax.

From the credit report, the creditor can get all the information about the lenders that have extended credit to the customer, payment history, credit limits, and the consistency in making timely payment across the different creditors. The information can then be used by the lender to make a decision on whether to approve or reject the loan application, based on the assessed risk level and past credit history.

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What Type of Information Does a Credit Review Collect?

Banks generally collect similar types of data in a credit review, be it an individual applying for a mortgage or home equity line of credit (HELOC), or a small business applying for a loan. In a situation where both the lender and borrower are businesses, much of the evaluation consists of analyzing the borrower’s balance sheet, cash flow statements, inventory turnover rates, debt structure, management performance as well as the current market conditions.

However, most prospective lenders concentrate on the following fundamental characteristics:

Capital

This is the money that is available to you to repay a loan through savings, investments or other assets. Even though creditors view your household income as the main source of repayment, note that any extra capital you display tells lenders that you can manage your finances well. This will make you less credit risk.

Collateral

A lender when conducting an annual credit review is interested in knowing the adequacy of the collateral pledged for the loan. Most especially, the lender determines if the fair value of the collateral is enough to cover the total amount of loan in case the borrower defaults.

Note that, where the borrower’s valuation of collateral is not satisfactory, the lender can institute an independent valuation of the asset in order to determine its estimated worth after taking into account the depreciation costs. The lender can also verify the ownership of the collateral by requiring the borrower to provide proof of ownership documents like title deed, logbook, etc.

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