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Determining What's Really Important to Lenders: Factors Affecting the Agricultural Loan Decision-Making Process

Author

Listed:
  • Christine Wilson

    () (Department of Agricultural Economics, College of Agriculture, Purdue University)

  • Allan Featherston

    ()

  • Terry Kastens

    () (Department of Agricultural Economics, Kansas State University)

  • John Jones

    ()

Abstract

Agricultural lenders in today’s environment face many challenges when evaluating the creditworthiness of farm borrowers. To address these challenges, a survey was conducted with financial institutions in Kansas and Indiana where agricultural lenders were asked for their response to hypothetical agricultural loan requests. Each loan request differed by the borrower’s character, financial record keeping, productive standing, Fair Isaac credit bureau score, and credit risk. Lenders provided information about themselves and their financial institutions. The survey data obtained determine the relative importance of financial and non-financial information when analyzing agricultural loan applications. Tobit models are estimated to identify the borrower and lender characteristics that are important in determining loan approval while OLS models are used to investigate the factors that affect interest rates offered to farm borrowers. The results provide a comparison of agricultural lending between two important agricultural states. The results from this analysis also provide lenders with insight on the factors that influence the decision making process of other agricultural lenders.

Suggested Citation

  • Christine Wilson & Allan Featherston & Terry Kastens & John Jones, 2006. "Determining What's Really Important to Lenders: Factors Affecting the Agricultural Loan Decision-Making Process," Working Papers 06-07, Purdue University, College of Agriculture, Department of Agricultural Economics.
  • Handle: RePEc:pae:wpaper:06-07
    as

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    File URL: http://ageconsearch.umn.edu/bitstream/28678/1/sp060007.pdf
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    Cited by:

    1. Myyrä, Sami, & Pietola, Kyosti & Heikkilä, Anna-Maija, 2011. "Farm Level Capital: Capital positions, structures, the dynamics of farm level investments, capital accumulation and leverage positions," Factor Markets Working Papers 105, Centre for European Policy Studies.
    2. Johannes I. F. Henning & Henry Jordaan, 2016. "Determinants of Financial Sustainability for Farm Credit Applications—A Delphi Study," Sustainability, MDPI, Open Access Journal, vol. 8(1), pages 1-15, January.

    More about this item

    Keywords

    Agricultural loans; Credit bureau score; Credit evaluation; Interest rates;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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