Five Cs Of Credit

A A A

DEFINITION

A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default.

The five Cs of credit are:

-Character
-Capacity
-Capital
-Collateral
-Conditions

INVESTOPEDIA EXPLAINS

This method of evaluating a borrower incorporates both qualitative and quantitative measures. The first factor is character, which refers to a borrower's reputation. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default. Collateral, such as property or large assets, helps to secure the loan. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.


RELATED TERMS
  1. Capital

    1) Financial assets or the financial value of assets, such as cash; and 2) The ...
  2. Slow Loan

    A loan that a lender considers at risk for nonpayment. Banks and lending institutions ...
  3. Collateral

    Property or other assets that a borrower offers a lender to secure a loan. If ...
  4. Default

    1. The failure to promptly pay interest or principal when due. Default occurs ...
  5. Loan

    The act of giving money, property or other material goods to a another party ...
  6. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
  7. Recurring Debt

    Any payment used to service a debt obligation that occurs on a continuing basis. ...
  8. Commercial Loan

    A debt-based funding arrangement that a business can set up with a financial ...
  9. Leveraged Benefits

    The use – by a business owner or professional practitioner – of their company’s ...
  10. Debt Consolidation

    The act of combining several loans or liabilities into one loan. Debt consolidation ...
Related Articles
  1. What Is A Corporate Credit Rating?
    Investing Basics

    What Is A Corporate Credit Rating?

  2. What's On A Consumer Credit Report? ...
    Credit & Loans

    What's On A Consumer Credit Report? ...

  3. The Importance Of Your Credit Rating
    Credit & Loans

    The Importance Of Your Credit Rating

  4. Increase Your Disposable Income
    Options & Futures

    Increase Your Disposable Income

  5. 4 Steps To Attaining A Mortgage
    Credit & Loans

    4 Steps To Attaining A Mortgage

  6. How A Bad Roommate Can Ruin Your Credit ...
    Personal Finance

    How A Bad Roommate Can Ruin Your Credit ...

  7. Too Much Debt For A Mortgage?
    Retirement

    Too Much Debt For A Mortgage?

  8. The History Of Consumer Credit Rights
    Credit & Loans

    The History Of Consumer Credit Rights

  9. 5 Things You Shouldn't Do During A Recession
    Budgeting

    5 Things You Shouldn't Do During A Recession

  10. How To Reduce Holiday Debt
    Credit & Loans

    How To Reduce Holiday Debt

comments powered by Disqus
Hot Definitions
  1. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  2. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  3. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  4. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  5. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  6. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
Trading Center