A method used by lenders to assess the credit worthiness of a potential borrower, and the chances of them defaulting on a loan. The system uses five factors to determine if the borrower qualifies for financing.
The five Cs stand for:
Character: This refers to the reputation of the borrower.
Capacity: This determines the borrower’s ability to repay their loan based on a comparison of their income to any recurring debts.
Capital: Lenders consider any large contributions toward the investment as a decreased chance of default.
Collateral: Property or large assets aid in securing the loan.
Conditions: The conditions of the loan, such as the principle amount and interest rate, influence the lender in their decision to finance the borrower.