We can all agree that lending money to most people sometimes end in making us lose our friendship or our relationship with them but what if there was a way to check people before we lend them cash or money
Most lending companies make use of this 5 Cs to verify if someone is eligible to borrow money from
The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
1. Character: this has to do with the borrower’s reputation, has this person been consistent with a certain quality of theirs, you can check with their credit history, when a friend of yours lended to that person, did they pay back?
Character is very important because this is who the borrower truly is and one of the most important factors to look out for because the person or individual might have all other factors and tick other boxes but if they don’t have a good character, they might not pay back.
2. Capacity: does the borrower have the ability to pay back within the time frame.
This is why most lending companies would ask you how much you earn monthly and what kind of accomodation where you stay, sometimes they ask for your account statement to see the inflow of money to check if you have the capacity to pay back.
So before you lend that money to that individual, do they have the capacity to pay back?
3. Capital: Capital can be thought of as a borrower’s overall financial strength
When someone is requesting for a loan from you, as a wise lender you should ask what the money would be used for and then ask the person how much that they have already raised towards that course, no matter how small it is, it shows you a little bit of the person’s capacity and the capital at hand that the person already has.
One thing also is that you can assess the ratio of the percentage at hand with the percentage of the amount he or she wants to borrow.
4. Collateral
This is the assurance that the lender has when the borrower doesn’t come through with the payment.
Most times it could be an asset that the borrower has that can’t be readily converted to cash, most lending companies always make sure that the collateral has more value than the amount being borrowed so that it can push the borrower to pay up on time and quickly.
The collateral sometimes doesn’t have to be an asset, it could be an insurance document, or even an insurance (you can insure money lended to people) it could be a bill of lading (a document showing the particulars of the goods owned being transported via the sea)
5. Conditions
These are the terms surrounding the payment, it could be the interest rate, state of the economy, length of the time the loan should be paid etc
When you make the interest rate high and the payment duration very short then you can see that you might be the reason why the borrower is in so much pressure to pay back.
Remember that this is not just about lending companies, there is wisdom to glean from this when you want to also borrow to a friend.
Happy lending people and I pray you gain understanding
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