The Loan Decision
The three "Cs" of banking are credit, character, and collateral. There are also five "Ps": people, purpose, payment, protection, and perspective. People and character have to do with the reputation of the borrower. Loans made to basically honest and trustworthy people have a better chance of being repaid than loans to those who are not. In the nineteenth and early twentieth centuries, it was not unusual for debtors to work for the rest of their lives to pay off loans that they had earlier defaulted on because of an adverse turn of events. Banking folklore could provide many examples of individuals whose whole purpose in life was to fulfill promises they had earlier made to a bank. A man's word was golden, and if it took twenty years of sweat and anguish to keep that word untarnished, so be it.
Of course, in those days, there was debtor's prison, an ingeniously designed institution to preclude a debtor from ever making good on debts. Perhaps debtor's prison was set up to motivate people to honor their debt obligations rather than giving them an opportunity to make restitution to someone they had financially wronged. In some respects, it was a step up from today's loansharks' way of enforcing repayment. Maybe the idea of dedicating oneself to making good on a debt gone bad was also a step up from today's street-smart advice to live a life of instant gratification. Not too long ago, spending was controlled by income with some thought given to saving a portion of every paycheck. Income now determines how much credit we can accumulate in order to sustain a degree of spending that exceeds the limit set by income.
Protection and collateral deal with assets that may have to be called upon if the payment and credit aspects of the loan fail to perform their purpose. Protection and collateral provide the primary defense against a loan going sour. Payment and credit provide the primary means of ensuring a loan will be repaid as originally scheduled. Payment and credit are not a defense mechanism to protect