The 5 C’s of credit are a set of criteria used by lenders to evaluate the borrower’s eligibility for a loan.
The 5 C’s are:
- Character: The borrower’s willingness and reliability in meeting financial obligations. Lenders may look at the borrower’s credit history, repayment history, previous loan defaults and other factors to assess their character.
- Capacity: The borrower’s ability to repay the loan. Lenders will look at the borrower’s income, expenses, and debt-to-income ratio to determine if they have enough financial capacity to handle the additional / new debt.
- Capital: The borrower’s financial reserves or assets that may be put towards the potential investment. Lenders also want to know if the borrower has enough assets, savings, that could potentially act as a safety net.
- Collateral: Assets the borrower can pledge to secure the loan. This provides an additional layer of security for the lender. If the borrower defaults on the loan, the lender can seize the collateral to recover their losses.
- Conditions: The economic and market conditions at the time of the loan application. Lenders will also consider factors such as interest rates, unemployment, and inflation, when assessing the borrower’s ability to repay.
The 5 C’s of credit are not always measured equally amongst lenders and not all C’s are as important as others. Some lenders may place more emphasis on character, while others may place more emphasis on capacity.
However, keep in mind – the 5 C’s are not a guarantee that a borrower will be approved for a loan!
To find out more, speak with the experts at Trusted Financial Choice.