The ‘Five Cs of Credit’
The five Cs help lenders make informed decisions about an applicant’s creditworthiness. These stand for character, capacity, collateral, conditions and capital.
This criteria is reasonably straightforward. When a lender is trying to make a decision regarding your application they’ll take into account your financial ‘character’. This really means - what are you like at managing money? Lenders do this by looking at your debts, credit limits, payment history and bank statements to get a better understanding of your financial behaviours.
For example, if you are someone that never misses a credit card repayment, a lender will look favourably on this. On the other hand, if your credit repayment history is inconsistent this could negatively impact your loan application.
For more information about how your financial history can impact your loan application read ‘why it’s important to know what’s in your credit file’.
Other factors that will be taken into consideration include employment stability, asset strength, credit history, any existing loans and your legal capacity to borrow.
Capacity basically looks at a borrower’s ability to repay a loan. A lender will therefore consider your income levels, how much debt you currently have and your net income position after any new borrowings are taken into account. While it’s impossible to predict unforeseen circumstances, financial institutions will do their best to forecast the likelihood of you honouring your financial commitments.
If you are using an asset as security for the loan, the lender will want to establish that the underlying asset (such as the home or vehicle) is of a satisfactory quality. This is important so that in the event the loan goes pear-shaped, the lender is able to recover the loan proceeds by selling the asset on the open market.
Conditions a lender may need to consider include industry updates or changes, the current state of the market or the location of your proposed property. For example, if you’re looking to obtain finance for an inner-city apartment, a lender might look at the number of vacant CBD apartments versus occupants, in order to evaluate any risks associated with the application. Other factors include the legality and practicality of the loan, such as the age of the person applying, or whether the lender could easily sell the property should this need arise.
Any finance you’ve personally invested into the purchase is known as capital. From a lender’s perspective, the more you’re willing to invest increases your perceived commitment to making repayments. In other words, if the going gets tough you are less likely to walk away if you have invested a lot of money.
You now have the insider’s scoop on what lenders are looking for when assessing a loan application. If you are looking to purchase a new home, investment property or motor vehicle but need a loan to help you get there, Liberty has a range of loans to help you get financial. Visit liberty.com.au.