Which concept describes the borrower's ability to repay a loan based on income and existing obligations?

• A. Capacity
• B. Character
• C. Collateral
• D. Conditions

Answer: (A)

Capacity measures the borrower's ability to repay a loan from the cash flow available after accounting for current obligations. Lenders look at income, job stability, and existing debts to estimate how much debt service the borrower can handle, often using the debt-to-income ratio. This focus on actual money coming in and going out determines whether the borrower can meet new payment obligations. Other factors in the four Cs—character (trustworthiness and credit history), collateral (assets pledged to secure the loan), and conditions (external factors like loan terms and the economy)—address different aspects of credit risk. Because capacity directly assesses the money available to support debt payments, it is the best description of repayment ability based on income and existing obligations.