34 MASS. EXPERIMENT STATION BULLETIN 405 



credit looks like a desirable policy. Nevertheless, it might be well to consider 

 the need for ample agricultural credit in the light of volume of production and 

 also to test more fully the capabilities of the borrower as a farmer. 



FACTORS AFFECTING A FARMER'S ABILITY TO REPAY LOANS 



Much careful work has been done and many fine studies made on the relation- 

 ship between certain objective factors and the success of loan repayment. In- 

 vestigation along the same lines was started with the material in this study, but 

 it soon became apparent that in reality a farm management study was being made. 

 Thus it appears that, as far as ability to repay a loan is considered, the most im- 

 portant factors are farm management factors of success: adaptation of type of 

 farming to the area; quality of the natural characteristics of the farm (soil, 

 topography, etc.) ; quality and variety of the physical additions to the farm (build- 

 ing, machinery, livestock, water, electricity, etc.); operation of social institutions 

 (taxes, prices, markets, roads); and immediate manifestations of the manage- 

 ment ability of the operator on the farm (size of business, rates of production, 

 labor efficiency, capital efficiency, diversification, etc.). 



However, it was also recognized, more from stories by neighbor farmers than 

 from the records themselves, that there are other factors which also affect repay- 

 ment ability. Among these are: the rate of spending or level of living aspired to 

 by the operator and his family; gifts and inheritances; and luck or so-called "acts 

 of God" such as fire, hurricane, flood, or conversely a good gravel pit, good pay- 

 ment for roads put through the farm, etc. 



Then there are some factors which concern the loans themselves and might 

 have been discussed under the adequacy of credit facilities. These are pressure 

 and method of repayment asked of the borrower to repay his loan; adaptation of 

 the length of time a loan is to run to the repaying ability of the asset purchased; 

 the relation of the size of loan to the value of the asset; and costs of the loan. 



Some of these factors are outside the strict realm of ability to repay. Still 

 further out there is another factor which is of importance, the attitude of the 

 borrower toward paying loans. 



The task of a scientific economist should be to measure the effect of each of 

 these factors. This has not been done, for three reasons: first, to do this would 

 require a record of the entire financial and social history of each farm; second, 

 the separation of the effect of each factor appears an impossibility; and third, 

 the measured average effect determined from any group of cases has little if any 

 relationship to the effect in individual cases. 



As far as repayment of loans is concerned, there are two main approaches 

 used by the creditor. The first and probably the most common is, "Can the 

 collateral be sold for as much as the amount of the loan or more?" In this case 

 it is entirely up to the borrower to determine his ability to repay the loan. The 

 second approach is, "Will this loan increase the borrower's earning capacity 

 enough to enable him to pay back interest and the principal?" In this case the 

 creditor tries to analyze the borrower and his business on the basis of the factors 

 mentioned above. It is a more humane and social approach than the first, but 

 it is more costly and takes more time. This approach is used primarily in grant- 

 ing short-time loans. 



In general there is one reason if not more why every loan is or is not repaid. 

 However, it is impossible to predict that any one reason or factor would assure 

 success or failure in every case. Dr. D. O. Hammerberg at the University of 

 Connecticut made an elaborate farm management study to determine factors or 



