Five Cs Of Credit

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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:

-Character
-Capacity
-Capital
-Collateral
-Conditions

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?"

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    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 >>
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