What are the five Cs of credit?

The five Cs of credit are essential criteria that lenders use to evaluate a borrower's creditworthiness. The correct answer includes Capital, Capacity, Collateral, Character, and Conditions, which are critical factors in the lending process.

• Capital refers to the borrower's own financial resources and assets. Lenders assess a borrower's capital to understand how much skin they have in the game, which can influence their ability to repay loans.

• Capacity indicates the borrower's ability to repay the loan. This is assessed through income, employment history, and existing debts. A lender wants to ensure that the borrower has enough income to cover loan payments.

• Collateral is an asset that a borrower can offer to secure a loan. It provides the lender with a form of security in case the borrower defaults. For instance, in a mortgage, the property itself usually serves as collateral.

• Character reflects the borrower’s credit history and repayment habits. Lenders look at credit scores and past loan behavior to gauge reliability and responsibility regarding managing debt.

• Conditions refer to the terms of the loan and the overall economic environment. This can include interest rates, regulatory guidelines, and the purpose of the loan. Lenders evaluate these factors to determine the appropriateness of the loan and its risks