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The 5 Cs of Credit and Their Importance

Updated: Apr 22, 2022


It is skeptic but true that there is no universal standard on what makes somebody financially sound. At the point when you apply for a credit facility - which can be a home loan, credit card, auto loan, and so on - , there are guidelines followed by lenders to determine if you are capable and likely to repay your loan on time. The banks usually look at your creditworthiness, the way you have repaid your past obligations, existing debts and if you can take up more debt.

The five Cs of credit offer lenders a structure to assess a candidate's eligibility for a loan. By considering a borrower's personality, ability to make installments, monetary circumstances and security, loan specialists can more likely understand the risk a borrower presents.

5 Cs Basic Question
Character Are you responsible and honest with regards to managing your finances?
Capacity Can you afford to get burdened under additional debt?
Capital Are you currently making a down payment?
Collateral Can you afford a secured loan?
Condition How are the capital markets reacting currently?

5Cs of Credit in Detail

Character: A bank will look at an applicant’s general reliability, character, and validity to decide the borrower's personality. The reason for performing these steps is to decide if the candidate is responsible when it comes to repaying loans. To assess a borrower's personality, lenders might access a candidate's financial record with respect to repayments and past history of loans and credit card transactions with other financial institutions. They might consider the borrower's work references, connections, certifications, and his/her reputation in the society.

Capacity: You can also look at it as cash flow. The bank needs to realize that your business can pay the loan back or not. The business ought to have adequate income or cash flow to help its costs of doing business and paying back the current debts, including the capability of handling new debts.

Capital: This includes your reserve funds and investments that you will put in toward your loan. One instance is the initial investment to purchase a home. Regularly, the bigger the upfront installment, the better your financing cost and loan terms will be. This is on the grounds that initial installments can show the bank your degree of seriousness and capacity to take care of the loan.

Yet, if anything surprising happens that could influence your capacity to take care of them, like an employment cutback, capital furnishes the moneylender with extra security. Your basic salary might be enough to take care of your expenses, but it also plays a major role in providing additional security for the money lenders.

Collateral: Guarantee gives confirmation to the bank if you can't pay for the credit. For instance, if you secure a home loan, the purchased home is your collateral. If you default on your loan, the bank can repossess the house. During the loan investigation stage, moneylenders will see what kind of assets they'll have to use as guarantee when they offer you a credit. There is an inverse relation between the risk and the assets you own. If you do not have enough assets for collateral in the background, the risk for the money lenders increases.

Condition: There are two major types of areas to consider while lending money to the borrower. Firstly, the money lender looks at the overall capital market’s condition which can impact the bank’s business in one or the other way. The other aspect to consider is the interest rate and the amount of principal. It is an obvious speculation that if the borrower pays the bigger principal amount, the interest rate will decrease.

Ways to improve the 5Cs of credit

It is true that you can improve your 5Cs of credit by following some steps. The aim of any borrower is to get low interest rates and sufficient loan amount while getting a loan from the money lenders. Some of the ways to improve your creditworthiness are mentioned below:

Increment in savings: Increasing your savings and assets can directly impact your credit worthiness. This will make your financial image better.

On-time due payments: The payment history of your EMIs and other utility bills add upto 35% of the borrower’s FICO score calculation. The on-time payments of your recursive bills can improve your credit score and directly impact your 5Cs of credit in a positive way.

Current installments: Making extra or larger payments towards your current debts can improve your credit score as well. This will allow the borrower to gain more credits in the future.

If you have a CIBIL score of 700 or more, you may be eligible for a home loan from SMFG Grihashakti at affordable rates of interest. To apply now, click on the “Apply now” button on this page or visit your nearest SMFG Grihashakti branch.

Must Read : Smart Tips To Improve Your CIBIL SCORE

Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.

SMFG India Home Finance Co. Ltd. (Formerly Fullerton India Home Finance Co. Ltd.)
CIN number: U65922TN2010PLC076972

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