The 5 Cs of credit

When you apply for a loan or mortgage there are several factors the lender will consider to determine if you qualify. We call these the five Cs of credit:

  • Character
  • Capacity
  • Capital
  • Collateral
  • Conditions

The five Cs are considered along with the amount you want to borrow, the term of the loan and the interest rate.

Character is the impression you make on the loan officer about your stability and willingness to repay the loan. This is partially determined by your credit history, history with the credit union and your interactions as a member. Character cannot simply be measured with a formula because it is a reflection of your personal qualities, reputation and habits.

Capacity is your ability to repay the money you borrow, which is determined by looking at your debt ratio. In its simplest terms, your debt ratio is calculated by dividing your monthly debt by your monthly income (before taxes). If your percentage of debt compared to your income is too high, it may be difficult for you to manage the payments of a mortgage or another loan.

Capital refers to your net worth and is the value of your assets minus your liabilities. If a member has good capital, it decreases the chance of default. For example, borrowers who have a down payment for a home typically find it easier to get a mortgage.

Collateral is property or large assets you own that can be used to help to secure the loan. For an asset to be considered collateral it must have an account or serial number of some type and the lender must be able to assign value to it and register a lien against it.

Conditions of the loan, such as its interest rate and amount of principal, influence a lender's desire to finance the borrower. Conditions also refer to how a borrower intends to use the money. If you apply for a car loan or a home improvement loan, you may be more likely to get approved because of the specific purpose, rather than a signature loan that could be used for anything.

For more information on your own credit and ability to be approved for a loan or mortgage, visit your Servus Financial Advisor.

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