5 C's of Credit

Know What Lenders Look For

Improve your chances of getting a loan by learning what we look for. When you apply for a loan, we look at a number of factors. We review your credit/payment history, income, and overall financial situation including the criteria commonly termed the 5 C’s of Credit: Character, Capital, Capacity, Conditions and Collateral.


We use your personal credit history as a measure of character, and a way to understand how reliable an applicant has been in repaying past loans. For example, how long you’ve lived at your current address, how long you’ve been in your current job, and whether you have a good record of paying your bills on time and in full is a subjective measure of both the borrower’s willingness and ability to repay the loan.

Qualifying for credit hinges largely on your credit history — the track record you’ve established while managing credit and making payments over time. Your credit report is primarily a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you. In addition to the credit report, we may also use a credit score that is a numeric value – usually between 300 and 850 – based on the information contained in your credit report. The credit score serves as an indicator for the lender about risk based on your credit history. Generally, the higher the score, the lower the risk.


While your household income is expected to be the primary source of repayment, capital represents the savings, investments, and other assets that can help repay the loan. This can be helpful if you lose your job or experience other setbacks.Capital refers to your net worth — the value of your assets minus your liabilities. In simple terms, how much you own (for example, car, real estate, cash, and investments) minus how much you owe.


We need to determine whether you can comfortably manage your payments. Your past income and employment history are good indicators of your ability to repay outstanding debt. Income amount, stability, and type of income may all be considered. The ratio of your current and any new debt as compared to your before-tax income, known as debt-to-income ratio (DTI), may be evaluated.


We will consider a number of outside circumstances that may affect the borrower’s financial situation and ability to repay, for example what’s happening in the local economy. We will also consider the loan’s purpose and how you plan to use the money, such as whether the loan will be used to purchase a vehicle or other property. 


(When applying for secured loans)

Loans, lines of credit, or credit cards you apply for may be secured or unsecured. With a secured product, such as an auto or home equity loan, you pledge something you own as collateral. The value of your collateral will be evaluated, and any existing debt secured by that collateral will be subtracted from the value. The remaining equity will play a factor in the lending decision.


By understanding the 5 C’s, you can do a little self-evaluation in order to better position yourself for a successful lending experience.

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