Five Cs of Credit

The five Cs of credit are a set of criteria used by lenders to assess the creditworthiness of a potential borrower. The five Cs are character, capacity, capital, collateral, and conditions.

Character refers to the borrower's willingness to repay the loan. Lenders will consider factors such as the borrower's employment history, credit history, and debt-to-income ratio to assess their character.

Capacity refers to the borrower's ability to repay the loan. Lenders will consider factors such as the borrower's income, assets, and expenses to assess their capacity.

Capital refers to the borrower's investment in the project or business. Lenders will consider the amount of money the borrower is putting into the project as a sign of their commitment.

Collateral refers to assets that the borrower can pledge to the lender in the event that they default on the loan. Lenders will consider the value of the collateral and the likelihood that it can be liquidated in the event of a default.

Conditions refer to the economic climate and other factors that may affect the borrower's ability to repay the loan. Lenders will consider factors such as the current interest rates, the state of the economy, and the borrower's industry to assess the conditions.

The five Cs of credit are a comprehensive framework for assessing creditworthiness. By considering all five factors, lenders can make more informed decisions about whether or not to extend credit to a borrower.