Five C's of Credit Lending

In the lending industry, lenders use various criteria to evaluate applicants for credit. The five C's of credit is a concept that deals with five important factors that lenders almost always examine when approving applicants for credit. If you're about to apply for a loan, look at these five factors to determine if you have a chance of being approved.

Character

One of the first factors that the lender evaluates is your character. This factor examines the likelihood of your repayment of the loan. The lender looks at your past credit history and references to determine if you have a solid character. This variable may be difficult to quantify, but lenders try to do it so that they can determine if you're a potentially trustworthy borrower.

Capacity

Capacity is the second variable that lenders look at when evaluating a credit applicant. Capacity deals with your ability to repay the loan over the long term. Lenders essentially look at how much money you generate on a regular basis to handle the loan payments. If you don't have a steady income, your application for credit will likely be denied.

Capital

Capital is the third "C" in the credit evaluation process. This criterion deals with how much money you personally have available to invest in the deal. For example, if you're borrowing money for business, the lender wants to see that you have sufficient cash to make a down payment. When you're invested in the item that you're buying with the loan money, you're more likely to repay it.

Collateral

The lender also wants to ensure that you have some type of collateral. Collateral involves putting up some type of property that the lender may repossess if you don't make your loan payments. In the case of a mortgage, the collateral is the house itself. Lenders evaluate the condition of the collateral to make sure that it's of sufficient value to pay for the amount that you're borrowing.

Conditions

The last factor that plays a role in credit evaluation is outside conditions. The lender evaluates the current market and all economic factors involved before making a decision. If times are hard, lenders are much less likely to hand out loans, because fewer people can afford to make payments on them.