A Look at the 5 C’s of credit
Ever wondered how lenders go about determining whether a person should be extended credit or not? Well, it all boils down to creditworthiness and lenders make use of the 5 C’s of credit to weigh the characteristics or rather determine how viable a given borrower is to be given credit. That said, an understanding of the 5 C’s of credit gives you a clear picture of how you will be evaluated and better still help you understand what you need to work on to improve your future chances of being advanced credit.
It is imperative to note that this particular form of borrower evaluation is all inclusive and incorporates both quantitative and qualitative measures. These entail lenders looking at income statements, credit reports, credit score as well as any other relevant borrower financial information instrumental in making an informed decision.
Loosely referred to as a credit history, your character is all about your reputation and track record in paying off your debts. Do you repay your debts in time? How trustworthy are you when extended credit? Your credit history gives your lender with sufficient information on your behaviour as a person in relation to your track record in repaying your debt. The better your credit history, the higher your chances of approval for credit.
Capacity in essence determines or rather measures the capability of a borrower to repay a loan. It is basically an assessment of a borrower’s income to debt ratio. In other words, the creditor makes an assessment of your income in comparison to your recurring debt. How stable is your current job? How long have you been in your current job? All these information is essential in determining a borrower’s capacity or rather ability to repay the loan.
When lenders assess your capital, they are basically assessing your net worth (Assets less liabilities). In other words, the lender assess your net assets less your net liabilities to determine how credit worthy you are.
Collateral is security of the borrower and refers to an asset that the lender has a right to repossess should the borrower be unable to repay the loan. It actually gives the lender confidence that in the unlikely event that a borrower can’t repay a loan, then their money is safe. Borrowers with collateral have a high chance of approval for a loan compared to borrowers without collateral.
Conditions simply refer to any circumstances that might in one way or the other impact the borrower’s ability to repay the loan. Lenders look at the prevailing economy, the viability of a borrowers business, the risks therein just to mention but a few.
To sum it up, while the above 5 C’s of credit form the bulk of the credit decisions lenders make, it is not uncommon for lenders to develop their own loan decisions. Being aware of what lenders look for make it simple for a person to put their house in order and improve their chances of getting access to credit when they eventually apply.