It is not a secret that banks want to make more money through lending but to risk as little as possible. If a potential lender finds that you do not meet the vision of an ideal borrower or if the amount you requested is too large, he will want additional guarantees. That is why it is imperative to know the 5 c's of credit, their meaning, and importance before applying for credit.
During an economically unstable time, getting a loan is sometimes the only way out of financial difficulties. Credit has become an indispensable everyday tool in the current economic system.
5 C's of credit
The goal of any bank operating in the field of lending is to issue the maximum number of loans and ensure their return. For a borrower to prove his reliability, they need to provide a particular set of documents in order to confirm the presence of permanent income and a property that can be pledged. For these purposes, banks often use the so-called 5 C's of a credit system.
5 C's of credit definition
This is a system that is used by banks to analyze the borrower and make a decision on granting a loan. Primarily, the 5 C's of credit management system consists of:
Credit history is one of the essential points of 5 C's of credit analysis. It tells you how much and when you borrowed, paid on time or delayed and when you applied to other banks for loans.
The primary information in the credit history is entered by employees of credit institutions: banks, microfinance organizations and consumer credit cooperatives.
Thus, a person who has not fulfilled his obligations to a bank at least once is immediately blacklisted by the credit history bureau. This bureau allows you to accumulate all data on borrowers in a single central catalog of credit histories. It is also worthwhile to say at once that the data on each particular borrower can be stored in the bureau for fifteen years from the moment the last changes were made to the credit history file.
The credit history of any borrower is a “financial passport,” errors in which can lead to adverse consequences and it will be difficult to correct them. Therefore, it is so important that before getting a loan, make sure that your credit file is in perfect condition.
The main task of any creditor is to correctly assess the risks of the client if it is possible for non-repayment of borrowed money.
When assessing the creditworthiness of citizens, credit organizations consider the following points:
- The ratio of the requested loan and the existing liabilities to the personal income of the client (debt load);
- The financial position of the borrower and his family members;
- The value of the property owned by the client;
- The status of the applicant's credit history;
- Personal characteristics of the applicant, his position on the “career ladder,” social status and so on.
Down payment is a part of the cost of an apartment, car, goods, which the borrower pays from his/her funds. Traditionally, in express lending, the bank makes it a condition that the borrower has a down payment of at least 10% of the cost. Usually, the higher the down payment, the higher the chances of getting a loan.
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In a mortgage, the higher the down payment the borrower has, the bigger the mortgage loan he can get, or he can shorten the loan period and overpayment for the purchased housing.
Recently, among banks, there has been a tendency to reduce the down payment, which immediately increases their place in the ratings of bank loans. Some banks are ready to reduce the size of the down payment to zero if the client agrees to provide additional real estate as collateral (apartment, house, land).
In essence, the collateral is a property that the borrower provides as security for the loan being processed. As a rule, if a non-cash credit is taken for some purchase, it is this purchase that will act as collateral. But there are reservations. The pledge can be provided by the borrower even if he takes out a loan in cash, And the pledge may not belong to the borrower, but the owner must be present at the registration of the transaction.
Usually, they are based on a trust loan - a loan issued by a bank for the purchase of a particular product. This can be both the purchase of real estate, a car, household goods, and the payment of education, recreation, repair, medical services, etc. The purpose of obtaining a loan is always stipulated in the contract between the bank and the client; a person cannot use the credit for other needs.
As a rule, the money is not handed to the borrower but is transferred by the bank directly to the seller’s account. Otherwise, the bank will require confirmation of the intended use of funds. Usually, target loans are offered directly at retail outlets, where the buyer can apply for a loan from a bank representative.
Usually, a loan issued for specific purposes costs the borrower less than credit for general purposes, since the bank knows what the borrowed funds will be spent on and its risk is less. Besides, the borrower in this case, as a rule, may qualify for a significant amount of the loan. We hope that the information provided above on the 5c's of credit will be beneficial to you.