Thursday, December 3, 2009
The 5 C's of Credit
By Shawn Chandok
Regardless of your financial stability, there is a high possibility that you will require a loan at some point in your life. Whether this is a bank loan, student loan, or any other type of loan, the qualifications for your eligibility will most likely be the same. Below, I will be discussing the 5 C’s of credit and how each one differs significantly.
1. Capacity is by far the most important of all the factors determines your eligibility for the loan because if specifies how you intend to pay the loan back. Lenders will usually project your expected cash flows and determine an interest rate suitable for you. Furthermore, they will look at your credit history to make sure you confirm you are a worthy investment for them and do not contain any risk, such as multiple previous bankruptcies.
2. Capital refers to the amount of your personal money you have invested for the project. The purpose of capital is to reduce the risk for the lender. If the lender feels you have a lot of your own money invested as well, his/her risk decreases because if the investment sinks, you sink as well. Thus he/she will be more willing to lend you money if you share the risk.
3. Collateral refers to the form of security you provide to the lender in case you cannot repay him/her. Most people will usually put their home/mortgage as collateral for the lender. If you cannot repay the lender, he/she will usually put a lien on your home until foreclosure is inevitable. What you should know is that, banks do not like foreclosures because they have to auction the home for a less value, which means they lose money.
4. Conditions merely reflect the circumstances for the loan. For example, are you taking the loan out for a family emergency or collage? Each condition creates a level of importance and lets the lender aware of your situation.
5. Character refers to the type of person you are. Lenders want someone who they know will pay them back on time. They usually check your educational background and confirm with your attitude. Although this may seem unimportant, this can sometimes be one of the most important criteria’s for a lender.