Have you ever been rejected multiple times on a loan application? And not just from one loan provider but from different loan companies at a different time in different locations. You may begin to wonder if there was a tag around you that makes these companies reject your loan request or they have a system of communicating rejected applicants among themselves. The fact is that there is a fool-proof method lender use to make lending decisions. With some information about your business or personal finance, they can determine whether you are eligible for a loan or not. This method is known as the 5 Cs of credit. While scoring a grade C in school does not attract applause, your overall score on each of these five Cs is what makes you eligible or ineligible for a loan. Are you a business owner looking to obtain credit to expand your business? Do you plan to secure a loan to achieve more with your personal finance?
Personal and Corporate reputation matters in business. No matter how attractive a credit transaction is, loan providers, want to deal with people with a positive track record of loan repayments.
Then keen attention to this article would yield much dividend on your next loan application.
Character
The first of the Cs and seemingly most important of all. Scoring low on this C while scoring high on other Cs still increases chances of another rejection. The character here implies creditworthiness. When a borrower pays back their loan as at when due and the required amount, it is a testimony to their integrity and a positive rating on their creditworthiness. Personal and Corporate reputation matters in business. No matter how attractive a credit transaction is, loan providers, want to deal with people with a positive track record of loan repayments. A credit score such as FICO score is used to rate a customer’s creditworthiness. The higher the score, the higher the chances of getting approved and vice versa.
Capacity
The Second C refers to a customer credit-ability. The ability of a borrower to pay back their loan. This holds a high premium in determining whether a customer is eligible for the loan application. A customer’s ability to pay back his loan is measured through the DTI ratio (Debt-to-Income Ratio). The DTI ratio is calculated by dividing the total debt owed by the gross income of the customer. The lower the borrower’s DTI ratio, the higher the chances of getting loan approval and vice-versa. The easiest way to prove your credit-ability is to maintain a positive cash-flow history whether as a business or an individual.
Capital
The third C here refers to a borrower’s skin in the game. This applies mostly to business loans or trade financing. When a borrower commits to finance up to a quarter of the needed amount, it is a proof of seriousness or commitment on the part of the borrower. And this often increases the chances of getting loan approval. Lenders are aware that when a borrower commits to financing part of the loan from 20% and above, the chances of default on the part of the borrower is greatly reduced.
Collateral
The fourth C has to do with security provision and risk mitigation by the borrower towards the lender. Most lending companies require collateral equal or greater in value of the requested loan especially when the loan amount is a huge one. When it comes to asset financing, the asset to be purchased often serve as the collateral for the loan. This is common practice with mortgages. Collateral from the borrower can also be seen as a skin in the game as in the case of Capital. A collateral provision in a loan transaction is referred to as a secured loan and greatly increase the chances of being approved.
Conditions
The fifth C is quite behavioral and might not apply to all lenders. Conditions here refers to the terms of the loan, the purpose of the loan or macro-economic events. A lender might be more encouraged to lend a borrower who has a specific purpose for the loan such as asset finance or import or export than personal loans or to finance a business operation. Also, a lender is more encouraged to lend a borrower during the economic boom than when the economy is on a recession.With the knowledge of these 5 Cs and scoring high on each of them guarantee you a higher chance of approval on your next loan application.