Question

Name and describe the “C’s” of credit that Banks and other lenders use in evaluating loan
applicants. Which do you consider the most important and Why?

Answer 1

The 6 C's of credit are

• Character. It refers to the specific purpose for which the loan is taken and also includes the intent of the borrower to repay the loan.
• Capacity. It refers to legal authority of the party to sign the binding contract. Capacity measures the borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio.
• Cash. It refers to the fact that the borrower has sound financial position and can repay the loan.
• Collateral. It means borrower has adequate assets to support the loans.Collateral is an item of value used to secure a loan. Collateral minimizes the risk for lenders. If a borrower defaults on the loan, the lender can seize the collateral and sell it.
• Conditions. It refers to economic conditions faced by borrower.For example If the borrower's company is facing strike then rhisvwill result in reduce profit and it will be difficult for borrower to repay loan.
• Control. It includes the answer to question that does loan meet written loan policy and how would loan be affected by changing laws and regulations.

Character is the most important C of lending.

Although it's called character, the first C more specifically refers to credit history: a borrower's reputation or track record for repaying debts. This information appears on the borrower's credit reports.The lender may take an account of certain information like information on collection accounts and bankruptcies, and they retain most information for seven to 10 years.This is the most important C because it firms the basis whether loan should be granted or not.