Overall, banks do not have universal guidelines on what makes potential borrowers creditworthy. Instead, they are led by general principles, which are commonly referred to as the 5C’s. These include capacity, character, capital, conditions, and collateral. These 5C’s are often used by lenders to evaluate the borrowers’ creditworthiness and capability to repay the loans. Character defines the borrower’s perceived trustworthiness and reputation. Capital is the amount of money that a borrower intends to put forward in the transaction. Capacity is the ability of the borrower to repay the loan. Conditions are defined by the present general state of the economy and the loan conditions that the borrower is seeking. Lastly, collateral is the insurance that the borrower is expected to provide in the event of a default. Lenders utilize these factors to traits of the borrower and loan conditions to estimate the possibility of default and subsequent financial loss risk. These measures incorporate quantitative and qualitative financial measures, which constitutes reviewing the borrower’s credit report and financial statements to reveal their financial situation.
Other C’s of Credit has also been suggested. According to Wilkinson (2013), two additional C’s of Credit comprise currency and country. In terms of currency, the lender evaluates the strength and stability of the currency that the borrower intends to obtain the loan. On the contrary, the country is considered in regard to political stability and the regulations governing financial institutions. On the other hand, West (2019) also defined two other C’s constituting compassion and courage. These revolve around the aspect that lenders should not be quick to disqualify borrowers with below-recommended credit scores. Banks should proceed further ahead and collect more information regarding their goals and ambitions, or even other extra data that might be critical towards disbursing the loan. However, based on Wilkinson’s and West’s additional C’s, the most favorable would be currency and country. This is because, unlike the former, these factors are quantitative and measurable, hence, enhances the lender’s decision-making process. In turn, this reduces the risk of default.
References
West, D. (2019). The case for 7 C’s for Credit. Web.
Wilkinson, J. (2013). 7 C’s of banking. Web.