When it comes to the overall health of your finances, credit plays a huge role in your ability to secure a loan, buy a home, and even get approved for a cell phone. Credit takes your financial habits into account, meaning that if you have been haphazard with spending, or have been unsuccessful in applying for loans before, your credit will likely take a hit. Alternatively, staying on top of your finances and making smart purchase decisions can do wonders for your credit, and can open up a number of different opportunities when it comes to securing loans and credit in the future.
There are a few key factors, or ‘characteristics’, that play a role in how healthy your credit can be, so it is important to become familiar with these ‘5 C’s’, or characteristics of credit. We’ve broken down these 5 C’s of credit to help you better understand how they can affect your financial and credit profiles.
5 C’s of Credit: Character
Character is an important factor that lenders take into consideration when deciding whether or not to approve you for a loan. Essentially, character comes down to how credible, trustworthy, and responsible you are with your finances. Lenders will use your credentials, references, and reputation to assess your character as they will only want to deal with borrowers who are going to be able to stay on top of their payments. A credit report will be used to showcase your capability of being able to handle a loan to lenders, so it is important to check your credit report regularly to see what your character looks like to lenders who may pull your report in the future.
Capacity will look at how capable you are of being able to repay a loan based on your available cash flow. When evaluating your capacity, lenders look at whether or not you will be able to cover new loan payments on top of any existing debt you may have. Some key factors that lenders take into consideration when determining your capacity are your income, and the stability of that income. If you are applying for a business loan, the business’s income will also be taken into consideration.
Regardless of what kind of loan you’re applying for, whether it be a business loan or a mortgage, lenders want to see that you’re committed enough to add some of your own funds into the mix. With business loans, lenders will look at the investments that the borrower has made in the business, including inventory and equipment. For mortgages and other loans, such as auto loans, lenders will look at the size of the down payment the borrower is contributing to the purchase.
Collateral can be used by a borrower to help secure a loan, as it gives the lender assurance that if the borrower is unable to pay back their loan, the lender can get something back by repossessing the collateral. An example of this would be the home that is purchased with the borrowed mortgage. Some loans that have collateral attached to them are sometimes referred to as secured loans and are typically considered to be less risky for lenders to issue.
One of the final factors that lenders take into consideration when determining whether or not to issue a loan is the length of time that you have been at your current job. This not only helps to inform the lender about your income, but it also helps them to get a sense of your job stability for the future. The conditions of a loan, such as the interest rate, influence the lender’s desire to finance the borrower. Loans that will be used towards things like a vehicle or home improvement might be easier for a lender to approve because they are loans that serve a specific purpose, rather than a general loan. Lenders will also take things like the economy and industry trends into account as well.
Regardless of whether you are applying for a business loan, a car loan, or a mortgage, understanding how your credit factors into your eligibility is incredibly important. Not only will it allow you to get a feel for what you may be approved for but being aware of your credit can also help you to make informed financial decisions that can help you in your financial future.