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The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision.  The five C’s are Character, Capacity, Capital, Collateral and Conditions.

Character is the personal and business reputation of the borrower. This C is sometimes referred to as Credit History.

Capacity refers to the means in which the borrower will repay the debt.  If the loan is to fund a business, the lender wants to know if the business will generate enough cash to both fund ongoing operations as well as pay back the loan.  For personal loans, the borrower needs to earn enough income to pay back the loan.

Capital refers to how much risk the borrower is willing to take with regard to the subject matter of the loan.  If this is a business loan, the lender will look at how much money the borrower put into the business.  If it’s insufficient, the lender won’t loan the money because the borrower isn’t willing to take much risk herself. 

Collateral is the property used to secure the loan.  Typically, it has a value equal to or even greater than the value of the loan.  Lenders seize collateral to repay the loan should the borrower default. 

Finally, Conditions refers to the financial conditions that exist at the time of the loan, including the prevailing interest rate, principal amount and general market conditions.

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