The Five C’s of Lending are a set of criteria that lenders use to evaluate the creditworthiness of potential borrowers. They include:
Character: This refers to the borrower’s reputation, integrity, and credit history. Lenders look at the borrower’s credit score, payment history, and other factors to assess their character and determine whether they are likely to repay the loan.
Capacity: This refers to the borrower’s ability to repay the loan. Lenders look at the borrower’s income, expenses, and other financial obligations to determine whether they have the capacity to repay the loan.
Capital: This refers to the borrower’s assets, including savings, investments, and other resources that can be used to repay the loan. Lenders may require collateral or a down payment to ensure that the borrower has sufficient capital to repay the loan.
Collateral: This refers to assets that the borrower pledges as security for the loan. Lenders may require collateral to reduce their risk and ensure that they can recover their money if the borrower defaults on the loan.
Conditions: This refers to the economic, industry, and other external factors that may affect the borrower’s ability to repay the loan. Lenders look at the borrower’s business plan, market conditions, and other factors to assess the conditions under which the loan will be repaid.
Overall, the Five C’s of Lending are a useful framework for lenders to evaluate potential borrowers and determine whether they are a good fit for a loan. By considering these factors, lenders can reduce their risk and make more informed lending decisions.