The “5 Cs of Credit” are a set of criteria that lenders often use to assess the creditworthiness of a borrower. They are:
- Character: Refers to the borrower’s reputation, trustworthiness, and history of fulfilling financial obligations.
- Capacity: Evaluates the borrower’s ability to repay the loan based on their income, financial stability, and debt-to-income ratio.
- Capital: Considers the borrower’s assets and net worth as a measure of their financial strength and ability to cover potential losses.
- Collateral: Involves the assets the borrower pledges as security for the loan, providing a source of repayment in case of default.
- Conditions: Takes into account the economic and industry factors that could impact the borrower’s ability to repay the loan, such as market trends and the purpose of the loan.
Lenders use these criteria to make informed decisions about extending credit and managing risk.
