In the process of a loan application, your lender evaluates your creditworthiness based on the 5 Cs of Credit - a set of five essential factors that determine your capacity to repay the loan. Familiarizing yourself with these crucial factors can aid in the preparation of your loan application and enhance your likelihood of obtaining approval.

1.     Character

Your character is a reflection of your integrity and reputation. Lenders will evaluate your credit history to determine if you have a good track record of repaying debts on time. Your credit score and credit report will be closely examined, along with any bankruptcies, foreclosures, or other negative marks. A good credit score, typically above 700, will demonstrate to lenders that you have good character and are likely to repay your loan on time.

2.     Capacity

Capacity refers to your ability to repay the loan. Lenders will evaluate your income, employment history, and other sources of income to determine if you have the financial capacity to repay the loan. They will look at your debt-to-income ratio, which is the percentage of your income that goes toward paying debts. A low debt-to-income ratio, typically below 36%, indicates that you have the capacity to repay the loan.

3.     Capital

Capital refers to a borrower’s overall financial strength, including any assets that could be used to support debt repayment if cash flow is insufficient. 

• For individuals, this could include marketable securities, such as stock exchange, or real estate assets that could be sold to raise cash.
•  For business and commercial borrowers, it’s important to understand the company’s capital structure – meaning what proportion of funding comes from debt vs. equity. If a company is generally under-leveraged, then a lender is likely more willing to extend credit than if that company were already over-leveraged. 

4.     Conditions

Conditions refer to the purpose of the loan and the economic conditions that may affect your ability to repay the loan. Lenders will evaluate the purpose of the loan, such as starting a business or buying a house, and determine if it is a good investment. They will also consider the economic conditions, such as interest rates and inflation, and determine if they are favorable for lending.

5.     Collateral

Collateral refers to the assets you have that can be used as security for the loan. Collateral is something of value that you pledge as security for the loan, such as a house or a car. Lenders will evaluate the value of your collateral and determine if it is sufficient to cover the loan amount in case of default. The higher the value of your collateral, the more likely you are to get approved for the loan. The value is based on the nature, condition and overall desirability of an asset.

Tips to Boost Your Creditworthiness

Having familiarized yourself with the 5 Cs of Credit, you can follow the below measures to enhance your creditworthiness and boost the likelihood of loan approval. Here are some suggestions: 

• Maintain a good credit score by paying bills on time and keeping debt levels low.
• Build a solid employment history by staying with the same employer for a long time.
• Have a clear purpose for the loan and provide documentation to support it.
• Be prepared to provide collateral if necessary.

By understanding and improving your 5 Cs of Credit, as well as following the tips provided, you can increase your chances of getting approved for a loan. So, take charge of your financial future today and start implementing these strategies to secure the funding you need for your business or personal needs.

More Resources

We appreciate you taking the time to read Falcon’s guide on the 5 Cs of Credit. If you're looking to continue your learning and further your career, we recommend checking out these valuable resources:

• Experian Credit Monitoring
• Free Credit Report
• Online Banking Services
• Financial Literacy Blog