Question

What are the Five C’s of Credit?

Answer 1

• 5 C's of Credit are - Capacity, Capital, Collateral, Conditions & Character. It's used by lenders to determine the creditworthiness of the borrower that's asking for financing. When a borrower applies for loan, lenders (banks) will assess credit risk based on these factors.
• Capacity - determines if borrower will be able to repay the loan. Ratios like debt to income may be used for analysis.
• Capital - analyzes borrower's net worth and assets. These assets or savings or investments can be used for repaying loan in case of setback (like loosing a job or businees failure).
• Collateral - borrower assets that can be used to secure the loan.
• Conditions - Lender will consider the purpose of the loan, as to whether it is being used to purchase automobile, house or a signature loan which can be used for any purpose. Risks will vary accordingly. Other factors such as economic and environmental conditions might also be considered.
• Character - reputation and trustworthiness will be assessed. Credit score & credit history report will be scrutunized. This point basically looks for personal integrity and good standing.