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The 5 Cs of Credit

Posted: 16 Nov 2015

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The credit checklist

Before you can borrow money, a credit provider (also known as a lender), want some level of certainty that you will be paying your debt. In order to do this, they use a process called “Underwriting” to evaluate you as a potential borrower. This process involves them making a decision whether to grant you a loan, but more importantly, the rates they will charge you. It is based on a review of five specific components of your financial situation. We often refer to them as “The Five C’s of Credit”.
  1. Capacity – Are you able to pay it back?
  • Do you have the ability to pay instalments when it’s due?
  • What does your income look like? (How long have you been employed?)
  • What is your income-to-debt ratio (your cash flow)?
  1. Capital – Do you have any funds or collateral to contribute?
  • What is your equity or how much are you worth?
  • Will you be able to withstand unexpected expenses?
  • How much do you own minus how much you owe?
  1. Collateral – What if you can’t repay it?
  • What ‘hard’ assets do you have?
  • Do you have something to secure the loan?
  • Are you able to guarantee payment in any way?
  1. Character – Will you pay if you can?
  • What does your credit history look like?
  • What is your willingness to pay?
  • Do you show a decent background, track record and ability to pay?
  • Favourable payment records
  • Your credit reputation
  1. Conditions – What else should a credit provider take into consideration?
  • The economic state of the country at that point in time
  • Whether you rent or own property
  • The loan amount and interest rates
  • The possibility that you might lose your job
  • Whether you are flexible enough to adapt if circumstances change

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