Last Updated on May 10, 2022 by admin
Do you want to learn what banks, credit unions and other financial institutions are considering during loan application review? Or do you want to improve your chances of getting approved when you apply for a loan and check out for 5 C’s of Credit ?
The five C’s of credit is a system used by lenders to gauge the creditworthiness of potential borrowers when you apply for a loan, mortgage or credit card…..Understanding these criteria may help you boost your creditworthiness and qualify for loan because loan application will be evaluated based on the 5 Cs of credit.
The five C’s of credit are character, capacity, capital, collateral, and conditions.
C – Character
Character is the borrower’s reputation and track record on how you managed debt in the past. Lenders use credit scores and your credit reports to determine whether you qualify for a loan or credit.They’ll also check for things like late payments, foreclosures and bankruptcies.
Lenders want to give out loans or credit to organized businesses that are more likely to make the repayments on time. Borrowers should have good credit scores or raise credit score before applying for loans.
C – Capacity
Capacity measures the borrower’s ability to repay a loan.Lenders can check your capacity by looking at how much debt you have and comparing it to how much income you earn. Your business should have sufficient cash flow to support its business expenses and debts comfortably
C – Capital
Capital is money you have already invested in your business and the amount of money you are seeking to invest. contributing your personal savings, investments and assets indicates that you are willing to take a personal risk.
C – Collateral
This is the security you pledge for a secured loan or secured credit card.It gives the lender the assurance that if the borrower defaults on the loan, the lender can get something back by repossessing the collateral. Providing collateral may help you secure a loan or credit card if you don’t qualify based on your creditworthiness
C – Conditions
The lender wants to know how you want to use the loan? the interest rate and amount of principal, the tenor of the loan. Lenders may also look at conditions outside your control—like how the economy is, federal interest rates and industry trends.It is a measure taken by lenders to minimize the chances of losing money.
Why Are the 5 C’s Important
The 5 Cs of Credit provides a comprehensive account of the borrower’s total debt, current balances, credit limits, and history of defaults and bankruptcies. it help determine the riskiness of a borrower or the likelihood that the loan’s principal and interest will be repaid in a full and timely manner.
You will have the best chance of being approved for a loan if you:
. Have a good to excellent credit rating for both your business and yourself
. Demonstrate your business will generate enough revenue to repay a loan
.Invest your own money in your business
.Prove that your business has a competitive advantage in the marketplace
. Secure the loan with business assets that can be sold to repay the loan if ever there was a default