Which term describes the degree of risk assessed by evaluating a loan request before approval?

• A. Due diligence
• B. Capacity
• C. Initial Public Offering
• D. Collateral

Answer: (A)

Due diligence is the comprehensive process lenders use to gauge how risky a loan is before approving it. It involves examining the borrower's financial statements, cash flow, debt levels, business plan, market conditions, and management track record to identify potential risks and how they might be mitigated. This full risk assessment helps determine whether to approve the loan and under what terms. Capacity, by contrast, focuses specifically on the borrower's ability to repay from future cash flow, collateral refers to assets pledged to secure the loan, and an Initial Public Offering is unrelated to evaluating loan risk.