The Five C’s of Credit

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When lenders are evaluating a loan request, whether it be a mortgage or a car loan the principles of the five C’s of credit are applied. There are varying formulas that are utilized for each of the C’s but nonetheless each category’s weight contributes to the final decision.

A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default. This method of evaluating a borrower incorporates both qualitative and quantitative measures.

CHARACTER Which refers to a borrower’s reputation, employment, past credit etc.

CAPACITY Measures a borrower’s ability to repay a loan by comparing income against recurring debts.

CAPITAL The lender will consider any capital (money) the borrower puts towards a potential investment, because a large contribution by the borrower will lessen the chance of default.

COLLATERAL Such as property or large asset, that helps to secure the loan. If the loan is against real estate then the quality of the property is a major consideration.

CONDITIONS The conditions of the loan, such as the interest rate, the term, principal reduction (amortization) and amount of the loan, will influence the lender’s desire to finance the borrower.

So after the credit grantor has evaluated each of the 5 C’s a decision is made based on the strength of the applicants “scoring” in each of the capacities. For example if the property or asset being offered is unacceptable then the loan request will be turned down, or other considerations such as weak credit or weak income could also be factors for a loan rejection. It is best to discuss these factors with a loan officer or Mortgage Broker before proceeding with conditional offers to purchase, so as to save time and anxiety.

Courtesy – CIR Mortgage Corp.

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