The 5 Cs Of Credit.
Several factors determine the level of credit that an individual or business will be given at a particular time. Some of these factors include credit history and credit score.
First of all, what is a Credit?
Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
Banks offer credits too. They offer credit to borrowers who have adverse credit histories with terms that benefit the banks themselves.
The 5 Cs Of Credit:
The Five Cs of credit are the five methods of evaluating a borrower for a loan. It also considers information about the loan. Let’s look at the five Cs below:
Character:
Character in this context refers to the credit history of a borrower. Credit history is the record of a borrower repaying debts. Lending platforms demand a certain amount of management of the credit history and will review the personal credit of borrowers and their guarantors before a loan is granted.
Lenders do this to evaluate the credit risk that is attached to both borrower and guarantor before giving out the loan.
Most lending platforms require a minimum credit score before they approve a loan. The level of credit score that must be met before a loan or credit can be granted varies (for every lending platform).
However, the higher the credit score of a lender, the higher the likelihood of being approved.
Capital:
The capital of a borrower is also an important factor to lenders.
Let’s say a borrower purchases an asset and pays about 50%-70% of the cost of the asset needing only about 50% to 30% loan, lenders are more likely to score such a borrower higher on the credit score. This shows that there’s a higher chance for the borrower to pay back the loan when due. A substantial down payment can also affect the rates and terms of an applicant’s loan.
Capacity:
Capacity simply deals with the potential of a borrower to repay a loan.
Just like the example used above, the capacity of a man who takes a 30% loan to complete the cost of his asset is greater than that of a man who takes a 60% loan.
Capacity entails the cash flow of a borrower. A borrower should have the sufficient cash flow to get a higher credit score. Lenders often inquire about the time a borrower has been employed or the number of years in business to ensure stability.
Conditions:
The interest rate and amount of principal affect the conditions of a loan.
Conditions sometimes include how a borrower intends to use the credit.
You may have come across this on loan apps, you’d be asked to select what you want to use the loan for.
Other conditions, such as the state of the economy or legislative changes, also affect the terms of the loan.
Collateral:
Lastly, collateral. This is so important to Lenders.
Collaterals help borrowers secure loans.
Banks or lending platforms use collateral as leverage in case a borrower defaults on a loan.
They are not being rigid, they are not just willing to risk lending money to businesses or individuals without some sort of reimbursement. Imagine what will happen to them if they don’t take the collateral and everyone decides not to pay back, they’ll go bankrupt right?
However, there’s also an advantage. Loans that require collateral are usually offered with lower interest rates and contain better terms than other unsecured types of loans. The lender knows that if the borrower defaults, the lender can recoup their loss by repossessing the collateral.
Conclusion
Understanding the five Cs of credit is important if you want your loan to be approved.
It will help you prepare a credit score ahead of any loan application.
It’s important also that there’s no default in even one area, as it can affect your credit score from a lender.