According to Important Credit News, the 5 C’s of credit is a system of quantitative and qualitative analysis that lenders use to gauge the risk or reward in lending money to their borrowers. These factors that support in determining your overall creditworthiness stand for: Character, Capacity, Capital, Collateral, and Condition.
Let’s define each one of them and see what lenders look for in each of these factors:
1. Character
Your financial character is more commonly represented by your credit score. Through that alone, your creditworthiness and money management can easily be determined.
When you are applying for a loan, whether for personal or business use, lenders look into deep on your credit report and other documents that support the stable condition where you will use the money. If you are borrowing for business, they will look at the overall growth potential, along with information on the market or industry.
2. Capacity
This refers to your ability to repay your debt obligations. Lenders analyze your capacity to pay back your loan by factoring in your cash flow and other financial assets that determine your level of liquidity. In this part of the analysis, they will also look into your debt-to-income ratio to see how much of your current income goes to paying off current debts, and how much more is left.
3. Collateral
Collateral refers to any valuable asset that you are willing to put down as a form of security for your loan. Whatever that collateral is, they would assess its potential growth value during the course of your loan term to determine if it is enough to cover for your payments in case of default. Some examples of collateral include properties, vehicles, equipment, fine art and collectibles, paper investments, savings account, and jewelry.
When you put down collateral with significant value, you can bargain for lower interest rates. Likewise, you give your lenders the favorable impression that you are also willing to risk your valuable asset towards your loan.
4. Capital
If you are applying for a business loan, capital refers to the amount of money you have put towards that business – the measure of your leverage. Lenders want to see how well you are managing this money and how much you have made it grow on your own.
5. Conditions
This refers to the economic condition at the time you applied for a loan. Certain economic conditions affect interest rates, terms of the loan, as well as the vulnerabilities or resiliencie of particular industries. Lenders, therefore, want to know if you can truly afford to take on a loan given a specific economic outlook; and if you can, how much of the accompanying risks can you manage.
How To Master The 5 C’s Of Credit?
Here is a basic guide that you can use to master the 5 C’s of credit and prepare you for your next loan application:
Character
● Improve all your personal and business dealings, especially with your bank. Your positive attributes will go a long way to come loan application time when lenders seek your network’s feedback.
● Monitor your credit report and understand what it contains. Dispute any wrong information that shows up there.
● Take positive credit behaviors to raise your credit score. Focus on these factors: payment history, credit utilization, credit history, credit account mix, and new accounts.
Capacity
● Pay a large portion of your debt to improve your debt-to-income ratio
● Take on practical and secure side jobs to have more repayment funds
Capital
● Increase your paid-up capital by seeking financial assistance from a close network
● If the loan is to be used for a small business venture or business expansion, provide supporting documents highlighting the minimal risks involved in such ventures.
Collateral
● Carefully appraise the value of your assets by seeking a professional assessor.
● If you are short on assets, search for a lender that does not require a personal guarantee or blanket lien over your assets
Condition
● Do not risk-taking a loan in a bad economy. Seek a consultant to help you weigh on the pros and cons of borrowing money under certain economic conditions
● Provide your lender with a clear plan on how you will use the funds, with supporting cash flow or income projection statement
Credit Conclusion
Your loan application, for whatever purpose, comes with a goal. When you have all those goals laid out, you can’t afford to be rejected by your lender. Knowing how much credit scrutiny goes with each loan application, the best thing now to do is to master the 5 C’s of credit to increase your chances of getting approved.
