What does the term 'capacity' refer to when applying for a loan?

The term 'capacity' in the context of applying for a loan specifically refers to the borrower's ability to repay the loan. Lenders assess capacity to understand if the applicant has enough income, financial stability, and creditworthiness to manage the debt obligations associated with the loan. This evaluation often includes reviewing the borrower’s income, employment history, existing debts, and overall financial health. A strong capacity means that the borrower is more likely to manage regular loan repayments without undue stress on their finances, leading to a lower risk for the lender.

While the other options may represent important factors in the loan application process, they do not define 'capacity.' Collateral is significant in securing the loan, the size of the loan affects repayment terms, and the purpose of the loan informs the lender about the borrower's intentions. However, it is the capacity that directly correlates to the financial ability to repay the loan that carries the most weight in determining whether a loan should be approved.