ARTICLES
The five C's of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default. The five Cs of credit are character, capacity, capital, collateral, and conditions.
The Five Cs Of Credit
This method of evaluating a borrower incorporates both qualitative and quantitative measures. Lenders look at a borrower's credit report, credit score, income statements and other documents relevant to the borrower's financial situation.
Character - sometimes called credit history, the first C refers to a borrower's reputation or track record for repaying debts. This information appears on the borrower's credit reports, generated by the three major credit bureaus Experian, TransUnion, and Equifax.
The credit reports contain detailed information about how much an applicant has borrowed in the past, and whether they have repaid the loans on time. These reports also contain information on collection accounts, judgments, liens, and bankruptcies, and they retain most information for the past seven years.
Capacity - measures a borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income ratio. In addition to examining income, lenders look at the length of time an applicant has been at their job and job stability.
Capital - lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default. Borrowers who have a down payment for a home typically find it easier to get a mortgage. Even special mortgages designed to make home ownership accessible to more people, such as loans guaranteed by the Federal Housing Authority (FHA) and the Veterans Administration (VA), require borrowers to put between 2 and 3.5% down on their homes. Down payments indicates the borrower's level of commitment because they also have something to lose if the loan goes into default.
Collateral - this helps the borrower secure the loan. It gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral. For example, car loans are secured by cars, and mortgages are secured by homes.
Conditions - the conditions of the loan, such as its term or length of time, interest rate, and amount of principal, influence the lender's desire to finance the borrower.
Conditions also refer to how the borrower intends to use the money. For example, if a borrower applies for a car loan or a home improvement loan, a lender may be more likely to approve those loans because of their specific purpose, rather than a signature loan that could be used for anything.
The Five Cs Of Credit
This method of evaluating a borrower incorporates both qualitative and quantitative measures. Lenders look at a borrower's credit report, credit score, income statements and other documents relevant to the borrower's financial situation.
Character - sometimes called credit history, the first C refers to a borrower's reputation or track record for repaying debts. This information appears on the borrower's credit reports, generated by the three major credit bureaus Experian, TransUnion, and Equifax.
The credit reports contain detailed information about how much an applicant has borrowed in the past, and whether they have repaid the loans on time. These reports also contain information on collection accounts, judgments, liens, and bankruptcies, and they retain most information for the past seven years.
Capacity - measures a borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income ratio. In addition to examining income, lenders look at the length of time an applicant has been at their job and job stability.
Capital - lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default. Borrowers who have a down payment for a home typically find it easier to get a mortgage. Even special mortgages designed to make home ownership accessible to more people, such as loans guaranteed by the Federal Housing Authority (FHA) and the Veterans Administration (VA), require borrowers to put between 2 and 3.5% down on their homes. Down payments indicates the borrower's level of commitment because they also have something to lose if the loan goes into default.
Collateral - this helps the borrower secure the loan. It gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral. For example, car loans are secured by cars, and mortgages are secured by homes.
Conditions - the conditions of the loan, such as its term or length of time, interest rate, and amount of principal, influence the lender's desire to finance the borrower.
Conditions also refer to how the borrower intends to use the money. For example, if a borrower applies for a car loan or a home improvement loan, a lender may be more likely to approve those loans because of their specific purpose, rather than a signature loan that could be used for anything.
RPE Category (Digital Digest)
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REAL ESTATE | CREDIT; MORTGAGE and LOANS | Credit
PUBLISHED:
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November 02, 2020
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