Money Monday – The 5 C’s of Credit
Most lenders consider five factors when determining whether to give you a loan.
CHARACTER. A lender studies your credit report to see how you have handled money/credit in the past because your past practice is the best predictor of your future performance. This allows him to concentrate on “what you have done” as well as “what you say you will do.”
CAPITAL. Lenders are concerned with how much “skin you will have in the game.” In other words, are you willing to put at risk your own monies, or just the monies of other people?
CAPACITY. This refers to your ability to repay the loan based on your income and outstanding debts. This is called debt-to-income ratio.
COLLATERAL. The lender looks for assets (security) that can make the loan “less risky” to him. A “secured” loan is less risky to the lender resulting in better terms than offered with unsecured loans. This explains why the lender holds the mortgage on the home or the title to the car until the loan is paid.
CONDITIONS. The lender also takes into consideration the amount of the loan, the purpose of the loan, and the prevailing interest rates, plus other conditions outside of the borrower’s control, such as the state of the economy, industry trends, or pending legislative changes.
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