When you apply for a loan, what determines whether you’ll be approved or denied? And if you’re approved, what determines the interest rate your lender will charge you or the amount you’ll be approved for?
It’s your creditworthiness.
And how does the lender determine your creditworthiness? They look at your credit report. Or more specifically, they assess the 5 C’s of credit.
Have you ever heard of these C’s? If you’re anything like most consumers, you haven’t. That’s why you’re here.
In this article, we’re diving into the 5 characteristics of credit. Read on and you’ll understand the various aspects of your credit score.
What comes to mind when you think of your character? It’s your behavior; how you interact with other people. Your character isn’t a secret. The people you spend your time with can tell the kind of person you are.
In the world of credit reporting, your character is your financial history. Are you the kind of person who pays back their debt on time? Do you have a history of defaulting on loans? Do you pay your bills on time?
When reviewing your credit report, you can easily find this information. Your financial character carries the most weight when a lender is trying to determine your creditworthiness.
Capacity is your financial ability to repay the loan you’re borrowing. A lender can determine your capacity by looking at your cash flows and debt to income ratio.
Once a lender has determined your capacity, they can use the information to award you a credit or loan limit.
When you’re taking out a business loan, the lender wants to know how much of your own money you’ve invested. Not many lenders are willing to finance 100 percent of the capital requirements of a business venture.
The same can be said of secured loans. If you’re looking to buy a house, you have to make a down payment. This can be considered capital.
The more capital you’ve invested, the more creditworthy you’re, and the more likely you’re to be approved for a loan.
There are two types of loans: secured loans and unsecured loans.
Secured loans are those that require some form of collateral before the lender can approve. A mortgage, car title loan, and equipment loan are good examples of secured loans.
When you have good collateral, you have a good chance of getting approved for credit. This is because the lender incurs a lower risk. Should you default, they can repossess the collateral and sell it off.
There are many conditions that can influence a lender’s decision-making process. These include the prevailing interest rate environment, amount of loan being sought, and purpose of the loan. Even prevailing economic conditions can weigh in.
Understand How the 5 C’s of Credit Can Affect You
The 5 C’s of credit have a big impact on the lender’s decision-making process. Some of these C’s, such as character and capacity, are within your control, and others, such as conditions, are not.
Strive to build excellent credit and keep reading our blog for more tips and insights.