Determining a loan applicant’s creditworthiness is a multifaceted exercise – There isn’t just one side to it but rather five sides. These five sides are popularly referred to as the 5 Cs of creditworthiness, and you as an applicant for a loan stand a better chance of getting your loan approved if your profile satisfies the requirements of the 5 Cs.
To ensure you have a clear understanding of what the 5 Cs stand for and how they might affect your next loan application, a clear description of each C is provided below.
To reduce the risk associated with granting a loan, a lender or financial institution will grant loans to only individuals who are proven to have a sound and creditworthy character.
To determine a loan applicant’s character, the lender will evaluate a borrower/applicant’s credit history. This is done by referring to a borrower’s reputation concerning settling debts, and the lender will come across this information by looking through the borrower’s credit reports. A credit report will provide detailed information concerning how much loan an applicant has received in the past, if the loan(s) have been repaid, and if they were repaid on time. Going by this information, a borrower will be able to determine an applicant’s character and thus his/her creditworthiness.
Capacity refers to an applicant/borrower’s ability to settle a loan by the expiration of its term. The lender will determine an applicant’s capacity by studying the applicant’s employment record, and comparing his/her financial income against recurring debts. This will lead to a conclusion on the applicant’s debt-to-income (DTI) ratio.
The third C is the borrower’s capital and the lender will measure this by considering the amount of capital a borrower has put towards any potential investments. A large investment of capital implies the borrower is less likely to default on the loan.
Collateral is what a borrower uses to secure a loan, and a lender will prefer if a loan applicant has a property which can serve as sufficient collateral to satisfy a loan in case of a default.
This C refers to conditions, which means how a borrower plans on utilising the loaned sum. Purpose of a loan can inspire a lender to either reject or accept an application.
Satisfying all 5 Cs will increase your chances of actually getting a loan. But knowing the 5 Cs isn’t enough. Before applying for a loan, you also need to know how much you can afford to borrow. This can be effectively accomplished with the aid of a personal loan calculator.