What does "capacity" refer to in the five Cs of credit?

"Capacity" in the context of the five Cs of credit refers specifically to the borrower's ability to repay loans. This element assesses whether an individual or business has sufficient income or cash flow to meet their debt obligations based on their existing financial liabilities. Lenders evaluate capacity by examining income statements, employment stability, and overall financial health to determine the likelihood that the borrower will be able to service the loan they are applying for.

This concept is crucial for lenders as it directly relates to the risk they take when extending credit. A higher capacity often suggests that the borrower is more likely to repay the loan, which can lead to improved loan terms or the approval of larger amounts. Evaluating capacity goes beyond simply checking an income figure; it often involves considering other financial commitments and overall economic conditions which can affect repayment ability.