Credit Factors

Access to credit to pay for education, a house, a car, or other items is integral to managing personal nances. Unfortunately, not all consumers can access the credit markets through mortgages, credit cards, auto loans, or personal lines of credit. In addition, lenders want assurance that the individuals they let borrow money will pay them back based on the terms and conditions of their agreement.

When it comes to offering credit, lenders often refer to the ‘5 Cs.’

1. Capacity
2. Character
3. Conditions
4. Collateral
5. Capital

Capacity

Capacity refers to the financial ability of a borrower to pay back a loan. For example, let’s compare two borrowers. They are both single and have no debt, but one earns Rs 50,000 per month, and the other earns Rs 35,000 per month. Based solely on this information, the borrower that brings home Rs 50,000 has more capacity. But, if that first borrower already has Rs 100,000 in loan and pays an EMI of Rs 20,000, giving only Rs 30,000 in discretionary income, the individual that brings Rs 35,000 home each month would have more capacity.

Character

Character is difficult to measure since it’s meant to reflect the personal reputation of the borrower. But, in some ways, this is what credit reports try to measure. They quantify the behavior of borrowers, such as whether the borrowers make payments on time, how many accounts they open, how they use those accounts, and how much debt they are willing to accumulate.