The Five C’s In Credit Evaluation By Sam Miller At Isnare.com Ezine Articles

Individuals and business that want to obtain or request for credit would have to undergo a process of evaluation before given the approval for a loan. The process called credit evaluation can take time and always involves an end, either an approval for a loan or rejection.

Before a potential debtor wants to obtain credit for a loan, he must make evaluations on certain areas. There are five C’s involved in credit evaluation. They are: character, credit report, capacity, cash flow, and collateral.

The character of a potential debtor is an important consideration used by lenders in loan grant. A thorough check of the lifestyle of the potential debtor can be undertaken on the part of the lender during the investigation. Nevertheless, the lender may also have to consider first impression as a criterion.

The character of a person applying for a loan is a big factor to the decision for loan approval. A person with a sound financial objective is likely to be granted a loan quickly and more possibly than an individual who is in bad shape, not just on the financial facet, but also on other aspects.

Credit history is another important factor considered by lenders in their decision to grant and approve loan applications. The credit report is a record of an individual’s past borrowing and reimbursing transactions. It also includes information about late payments and bankruptcy.

Credit rating can be a part of the credit history of an individual. It is the rating of credit reputation or creditworthiness of an individual. Businesses also have their own credit ratings. The credit rating and report are significant to businesses in their intention to apply for a business line of credit.

The credit score is also an important scoring system of an individual borrower. The score shows the worthiness of an individual borrower for a credit.

For an individual borrower to earn the nods of several lenders, he has to build his credit history. The credit report is an important record of information to a lender. If the credit report does not contain substantial details of borrowing and repaying transactions, it is unlikely for an individual to be granted with a loan, unless the lender has certain conditions.

A credit report can be tarnished. A credit score can be at its low. When these things happen to your credit background, it is unlikely for you to earn the approval of the lender for a loan. However, if your cash flow is good, there is a possibility for you to be granted a loan.

Lenders may also have to check the liquidity of an individual. This can be done by checking the bank statements of an individual borrower. In the case of businesses, lenders may have to obtain a copy of the audited financial statements.

The financial statements of businesses and bank statements can be utilized to show the capacity of a borrower to settle and repay a line of credit. The capacity of the borrower to pay a loan is determined during credit evaluation and approval.

Meanwhile, the collateral is a common term in credit. A lender seeks for security whenever the borrower defaults the loan payment. If no collateral is presented as security for a loan, it is likely that the lender will give the borrower a high-interest rate loan.

Credit evaluation is a process taken by the lender with the participation of the loan applicant. If you want to undergo this process, it is important to make substantial preparation so you are more likely to obtain a loan quickly and less expensively.

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