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The 5 C’s Explained: What Lenders Look for When Approving Loans

woman helping client with loan documents

If you’re thinking about applying for a personal loan, the process can seem overwhelming and mysterious. So much paperwork, so many questions, and so little guidance on what you need to qualify for approval. What are the basic requirements? Here are a few things lenders look for during the process.

The Five C’s of Credit

Stringent requirements are in place for only one reason: The underwriter needs to be confident that a borrower can pay back funds. They will be doing a deep dive into your finances, including how much “free” money you have per month that isn’t used to pay essential bills. They will also evaluate how financially responsible you are and if you earn enough money to consistently make monthly payments. These requirements are covered under The 5 C’s of Credit. Let’s take a closer look.

1. Character

Your character, in this case, involves how you handle debt. Your history is evaluated, including how much you owe, how many late payments you have on the report, and even things such as the number of hard inquiries you have had in a set amount of time. This is usually a year or two, and factors in the age of your accounts. In short, your character represents your ability and willingness to repay what has been lent to you.

Many underwriters have a minimum score which automatically disqualifies potential borrowers who do not meet the criteria. Others consider multiple inquiries in a short time as a sign that someone is in financial trouble. 

Character Tips

  • Remember that every new card lowers your history’s age.
  • Keep payments timely…every payment, every time. Auto-pay options are a great way to ensure this is done.
  • Limit inquiries, and if you need another card, only apply for offers with a pre-approval (which is different from a pre-qualified offer).
  • Consider a secured option that increases your odds of approval by providing the underwriters with collateral.

2. Capacity

Your capacity involves your ability to repay the funds. This will balance largely on your debt-to-income ratio. A simple formula for calculating this is to add up all monthly bills, divide this number by your pre-tax monthly income, and multiply that by 100. If the ratio is less than 36%, you have better odds of funding approval. It’s also recommended that card usage should remain below 30% of the total available limit for each card.

3. Capital

The application will ask you to provide proof of assets, investments, or savings amounts. It’s their way of protecting themselves should you lose your job, become incapacitated, or have some other complication that prevents you from repaying your financial obligations. Underwriters may require a deeper look into your available capital if your score or your ratio isn’t quite enough to qualify for funding. 

Not many people have extra money stashed away in investments and savings. For them, secured options are the perfect solution. 

4. Collateral 

Your collateral is something you can provide to secure the funds. Sometimes, as in the case of purchasing a home or an automobile, the purchased item becomes the security and can be taken by the financial institution if you default. A secured card requires an initial deposit of money to offer a little protection to the financial institution if you become unable to pay your balance.

Secured loans are approved easier than unsecured ones and are an excellent choice for first-time borrowers, people without a significant credit history, and those with less than perfect scores.

5. Conditions

Conditions are other pieces of information that can help tip the application in your favor. These can include external factors, such as the current economy and its effects on your payment history. They can also include specific uses for the funds. You are more likely to receive approval if you pay off existing debt, for example, since it’s more of a trade-off and rebalancing rather than taking on entirely new loan.

There isn’t much you can do to meet conditions, but always be honest regarding the purpose of the funds. Home improvements, debt consolidation, and emergency expenses may hold slightly more favorable odds of approval, but these conditions are all specific to the financial institution.

Using the 5 C’s of Credit to Your Advantage

By understanding the basic things underwriters are looking for, you can take steps to increase your odds of approval. Improving your score and paying your debts consistently will go a long way toward establishing yourself as a low-risk borrower.

At Bay Country Financial Services, you are more than just a score. We say “yes” when other lenders say “no.” You can apply for secured options, which greatly increases your approval odds. With fast same-day approval, no application fees, and available funds up to $50,000 we offer the perfect solutions for those who need funding but may face rejection by traditional financial institutions. See what our budget-friendly options and friendly professionals can do for you. If you need money, we have your funds. Contact us now!