The 5 Cs of credit that impact your loan application
11 AUGUST 2023
In the past, getting credit was easy. That was not a good thing. Nowadays, there are many more hoops to jump through when wanting to lend money, and it’s all for good reason.Having to complete reams of paperwork and then wait for your credit to be approved may feel like a frustrating process but really, it is a means to protect you as well as the lender. Lenders have a responsibility to not offer or extend credit to you if you can’t reasonably be expected to pay it back.
Similarly, lenders also need to ensure (for their own sake) that when they offer you credit, they are going to get their money back. One way to understand just what lenders are looking for when determining if you are someone they can give credit to is by applying the 5 Cs of credit: credit history, capacity, collateral, capital, and conditions. Here’s what they mean:
Your credit history is your financial track record, established over the years, showing how you’ve managed credit and made payments. This information is collected by credit bureaus and filtered into credit reports which are regularly updated. Credit reports all contain the same types of information (types of credit you have, payment history, etc.) but may vary depending on the credit bureau issuing it. These reports will also show your credit score which is a numeric value serving as a risk indicator for a lender, based on your credit history.
Lenders must ascertain if you can comfortably afford payments. This affordability is informed by your income and employment history which are generally regarded as good indicators of your capacity to repay outstanding debt. Also considered is your income amount, type of income and perceived stability with especially your debt-to-income ratio weighing heavily as an indicator of your credit capacity.
Lines of credit or credit cards may be either secured or unsecured loans. While unsecured loans have no asset underwriting them, a secured loan offers an asset like your home, or a motor vehicle, as collateral to secure the requested credit. When applying for a secured loan, the value of your collateral will be determined, with any other secured debt subtracted from the value, before a final decision is made by a lender regarding how much credit to offer you.
Your household income, as mentioned, is generally regarded as your primary source of repayment. However, capital in the form of savings, investments and other assets may also be called upon to repay loans, especially in the case of job loss or in the event of an unforeseen emergency.
When applying for a loan or credit, you may be asked by the lender what you intend doing with the money. Though not formally scripted, lenders will generally have a list of acceptable uses for the money, such as adding another room to your house. Taking out a loan to have a facelift may however be harder to justify in the eyes of a lender. For this reason, certain loan conditions may be applied as part of the loan provisions.
ENSURE YOUR 5 CS ARE IN GOOD STANDING SO YOU CAN GET THE BEST CREDIT
Knowing about the 5 Cs of credit, and understanding their impact, will help you be prepared the next time you apply for credit. At RCS, we are here to help and make it possible for you. Give us a call at 0861 727 729 if you want to learn more about the 5 Cs before applying for credit.