Share this article
 |  |  |
When an individual or a business appliesfor a loan (called "credit" in the banking world), there are a number of things that a lender will consider before deciding whether or not to approve the request. The lender will typically follow what is called theFive Cs of Credit: Character, Capacity, Capital, Collateral and Conditions. Examining each of these things helps the lender determine the level of risk associated with providing the borrower with the requested funds. Read more on the breakdown of each C below:
1. Character– Character is reflected in the banking consumer's levelof responsibility and willingness to meet their obligations. In a lending scenario, your character is strongly weightedby your credit report. Your credit report is a detailed report outlining your credit history, including anyloans you have had, credit cards and more. Thereportshows how you have handled credit in the past andgives an indication of how you will handle it in the future. It is also used to generate yourcredit score, which gives lenders a quick look at your financial habits.
2. Capacity– Capacity is determined by a number of factors:
- Sources of income- are you salaried, commission based, self-employed or a seasonal worker?
- Stability of income- how long have youbeen at your job andis youremployer a new business or are they well established?
- Total Debt Service Ratio (TDSR)- TDSR is calculated by adding together your mortgage or rental payments, property taxes and all other debt payments (credit cards, loans, lines of credit, etc). The sum of all debt payments is then divided by yourgross income. Typically, a lender will look at 40%TDSR as the maximum level.
When the lender looks at your income sources, stability and TDSR, they are able to determine your capacity to pay back a loan.
3. Capital– Lenders like to see the borrower investing their own capital into a project, as it shows a seriousness about the investment. A great example of this is having a down payment in order to secure a mortgage. Net worthis another good way to determine capital. Your net worth is determined by comparing the value of what you own to what you owe.A high net worth indicates stability and also good savings or budgeting habits.
4.Collateral– Sometimes when you apply for a loan, you have the option to offer collateralasa way to strengthen the application. This means that, in the instance you aren't able to repay your loan, the lender can repossess the collateral as payment. Thiscould be your home, a vehicle, other assets or whatever you have negotiated with the lender. Providing collateral can also reduce the interest rate on the loan, as it reduces the risk to the lender.
5. Conditions– The conditions of your loan are also considered before it is granted. This includes the interest rate, the repayment term, the amount and the purpose of the money. If a lender knows the money is intended for a specific purpose, they may be more likely to approve your request than if you are applying for a loan just to have the available credit.
If you’re interested in learning more about the FiveCs of Credit, what it means for you when applying for a loan or have any other questions related to being approved for financing, one of our Financial Advisors orCommercial Team Members would be more than happy to talk to you. You can connect with someone by calling 902.492.6500 or emailinginfo@cua.com.
Revised Jul. 21, 2021
Read More
 |  |  |
