Understanding the Four Cs of Credit

Credit History

A record of a borrower's ability to make timely payments and manage credit. It often includes a credit score, which is a numerical representation of credit risk based on credit history. Higher scores suggest a better credit history and increase the likelihood of favorable loan terms.

Capacity

Refers to a borrower's ability to repay a loan, evaluated through income sources, employment history, and current debts. The debt-to-income ratio is a common measure for assessing capacity, indicating what portion of a borrower's income is used for debt repayment.

Capital

Considers the borrower's assets and net worth, including savings, investments, and other resources. It assesses financial stability and the ability to repay the loan in cases of reduced income.

Collateral

In secured loans like mortgages, collateral is an asset securing the loan, such as the property being purchased. The collateral's value can influence loan terms, with more valuable assets often leading to better terms.

These factors are crucial in a lender's decision-making process, influencing both the likelihood of loan approval and the terms of the loan.