Five Cs Of Credit


DEFINITION of 'Five Cs Of Credit'

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:



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BREAKING DOWN 'Five Cs Of Credit'

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.

For more on the five Cs, check out "Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?"

  1. Capital

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

    A loan that a lender considers at risk for nonpayment. Banks ...
  3. Default

    1. The failure to promptly pay interest or principal when due. ...
  4. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  5. Loan

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

    A loan that is issued and supported only by the borrower's creditworthiness, ...
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  1. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Banks use rigorous policies and analyses when determining if and how much money to lend to clients. The methods used by banks ... Read Full Answer >>
  2. Do all banks use the Five Cs of Credit when evaluating potential borrowers?

    Both individual and business borrowers are asked to provide information related to their credit history, income and debt ... Read Full Answer >>
  3. What is the most important "C" in the Five Cs of Credit?

    Financial institutions attempt to mitigate the risk of lending to unworthy borrowers by performing a credit analysis on individuals ... Read Full Answer >>
  4. How do banks measure the Five Cs of Credit?

    The five C's of credit is a valuable tool used by banks to determine a borrower's creditworthiness. Credit analysts developed ... Read Full Answer >>
  5. What is the difference between the Five Cs of Credit and credit rating?

    The five C's of credit comprise a list of factors used by lenders to predict the probability of a borrower defaulting on ... Read Full Answer >>
  6. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>

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