A key part of the lending process involves the 6Cs of credit. While the use of...

A key part of the lending process involves the 6Cs of credit. While the use of credit scoring models is growing in importance, many loans must be evaluated using the traditional method, 6Cs. Critically explain them.

Expert Solution

6Cs of credit are as follows :-

i) Character :- This is very much subjective lenders have to judge the borrower whether borrower will be able to repay it or not.It can be judged by reviewing personal credit history, education.

ii) Capacity :- This the ability of company to repay the loan.Capacity can be evaluated by evaluating cash flow,payment history,sources of repayment.

iii) Capital :- Whether company's owner fund invested and what amount invested and the risk that company would bear in case of failure.

iv) Collateral :- Machinery and current assets that can be sold in case of failure to repay the loan.Borrower also consider some percentage of margin on this value.

v) Conditions :- The overall economic conditions must also be checked before granting loan.Performance of industry to which it belongs and future expectations.

vi) Confidence :- An honest borrower provides confidence to the lender by satisfying him with all the remaining 5 C's and by complaing all the conditions of loan.

jeff jeffy answered 6 months ago

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