ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Put simply, repayment capacity is your ability to repay a loan timely. Lending institutions want to ensure that you, as a borrower, will be able to pay the loan EMIs without any delays or default comfortably. To this end, they analyse several factors, such as: Monthly disposable income.

Detailed explanation-2: -Capacity, one of the most important of all five factors, is how the borrower will pay back a loan. Capacity includes the ability to pay current financial commitments, repay any new debt, provide for replacement allowances, make payments for family living and maintain reserves for adversity.

Detailed explanation-3: -Capacity measures your ability to repay new debt based on your current obligations. Here, your cash flow is paramount, along with your debt-to-income ratio. Lenders want to know how much you owe versus how much you own. The lower your debt-to-income ratio, the more favorably a bank will look at your request for credit.

Detailed explanation-4: -The capital debt repayment capacity margin is computed by subtracting interest expense on term debt, principal on term debt and capital leases, and unpaid operating debt from prior periods from capital debt repayment capacity.

Detailed explanation-5: -As a general rule, repayment capacity provides an understanding of whether the company will be able to repay its creditors by establishing a ratio between the adjusted accessible funds and the debt service. It is calculated using the debt-service coverage ratio.