The Five C's Of Credit In Credit Selection Activity
QUESTION 2
Discuss the role of the five C’s of credit in the credit selection activity.
The five C’s of a credit system is used by lender to gauge the creditworthiness of a potential borrower. The credit selection activity weighs five characteristics of the borrower and conditions of the loan, attempting to estimate and gauge the probability of default. The writer is going to discuss the role of five C’s of credit which are character, capacity, capital, collateral and conditions in the credit selection activity. Terms to be defined “creditworthiness”
Definition of terms
The Investopedia online (2017) broadly defined creditworthiness as “ a valuation performed by lenders that determines the possibility a borrower may default on his debt obligations. It considers factors, such as repayment history and credit score.”
The financial dictionary (2017) has this to say, “The ability to borrow money. The better one's creditworthiness, the more likely it is that a bank or other financial institution will extend credit.”
Therefore, creditworthiness is an evaluation of credit risk of a prospective debtor, this can be an individual, a business or a government predicting its ability to pay back the debt and forecasting of the likelihood that the debtor will default.
a. …show more content…
Character. Gitman and Zutter (2012: 615) opines that it is “ the applicant’s record of meeting pass obligations. This is the integrity that the debtor has as to the obligation that he/she feels to repay the loan. Since there is not an accurate way to judge character, the lender will decide subjectively whether or not you are sufficiently trustworthy to repay the loan. The lender will investigate the willingness to pay through payment history, review a credit bureau report, and consider educational background and experience in business. The quality of references and the background and experience of employees will also be
Discuss the role of the five C’s of credit in the credit selection activity.
The five C’s of a credit system is used by lender to gauge the creditworthiness of a potential borrower. The credit selection activity weighs five characteristics of the borrower and conditions of the loan, attempting to estimate and gauge the probability of default. The writer is going to discuss the role of five C’s of credit which are character, capacity, capital, collateral and conditions in the credit selection activity. Terms to be defined “creditworthiness”
Definition of terms
The Investopedia online (2017) broadly defined creditworthiness as “ a valuation performed by lenders that determines the possibility a borrower may default on his debt obligations. It considers factors, such as repayment history and credit score.”
The financial dictionary (2017) has this to say, “The ability to borrow money. The better one's creditworthiness, the more likely it is that a bank or other financial institution will extend credit.”
Therefore, creditworthiness is an evaluation of credit risk of a prospective debtor, this can be an individual, a business or a government predicting its ability to pay back the debt and forecasting of the likelihood that the debtor will default.
a. …show more content…
Character. Gitman and Zutter (2012: 615) opines that it is “ the applicant’s record of meeting pass obligations. This is the integrity that the debtor has as to the obligation that he/she feels to repay the loan. Since there is not an accurate way to judge character, the lender will decide subjectively whether or not you are sufficiently trustworthy to repay the loan. The lender will investigate the willingness to pay through payment history, review a credit bureau report, and consider educational background and experience in business. The quality of references and the background and experience of employees will also be