Next video:
Loading the player...

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.

Related Articles
  1. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  2. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  3. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  4. Small Business

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  5. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  6. Personal Finance

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  7. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  8. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  9. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  10. Personal Finance

    Can't Get A Bank Loan? Turn To Your Neighbor

    Peer-to-peer lending can be an inexpensive way to gain access to credit when banks are restricting lending -- but you need to understand the entire deal first before jumping in.
Hot Definitions
  1. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  2. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  3. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  4. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
  5. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, ...
  6. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
Trading Center