The five Cs refer to a system of credit utilized by lenders, in this case, the Common Wealth Bank, to evaluate the creditworthiness of potential borrowers. The system works by assessing five attributes of the borrowers and features of the loan in an attempt to weigh the likelihood of default (Bryant, 2012, pp. 120). The five Cs include capacity, character, collateral, capital, and conditions. The five Cs criterion of assessing borrowers adopts both the quantitative and qualitative measures. The Common Wealth Bank collects the five Cs before releasing loans to potential borrowers.
The five Cs
The character refers to the credit history of a borrower. The bank is keen to follow the track record or reputation of borrowers when it comes to repaying debts. The Common Wealth Bank gets this information from the borrower’s credit reports which are generated by credit bureaus such as the TransUnion, Experian, and Experian (Duarte, Siegel, and Young, 2012, pp. 2470). The credit reports give details about the amount borrowed in the past, whether the borrowers repaid their loans on time and whether they have outstanding loans. Other types of information contained in the reports include liens and bankruptcies, collection accounts, and judgments.
The second C refers to the capacity. The Common Wealth Bank gauges the borrower’s potential or ability to repay the requested loan. The tool used to determine the borrower’s capacity compares the income against the recurring debts and gauging the borrower’s debt-to-income (DTI) ratio (Marqués, García, and Sánchez, 2012, pp. 10921). Other factors that are determined under the capacity criterion include the duration the borrower has been working and the job stability.
The capital or the potential investment of the borrower is another factor that the bank puts into consideration before releasing loans. Huge investment contribution means that the chance of default is low. When it comes to getting a mortgage, for instance, an individual who has a down payment is likely to get the mortgage. The same consideration is applied by banks in an attempt to gauge the creditworthiness of their borrowers.
The fourth C that is applied by the Common Wealth Bank is the collateral. The bank needs assurance that the borrowers are going to pay their loans. Car loans, for instance, are secured by cars while mortgages are protected by homes. For the lenders, collateral is a crucial investment since the borrowers would not be willing to lose their property (Bryant, L., 2012, pp. 130). Therefore, the Common Wealth Bank will be more secure giving loans to borrowers who have collateral.
The last C that is collected by the Common Wealth Bank is the condition or state of the loan. Conditions such as the amount of principal and interest rate influence the final decision of the lender on whether to approve or reject the loan application. Conditions refer to the purpose of the loan or how the borrower plans to spend the money (Guiral, 2012, pp. 81). The Common Wealth Bank is more likely to give loans to the borrowers who plan to use the money to buy a home or a car, rather than approve a signature loan that has no particular purpose.
Bryant, L., 2012. An assessment of development funding for new housing post GFC in Queensland, Australia. International Journal of Housing Markets and Analysis, 5(2), pp.118-133.
Duarte, J., Siegel, S. and Young, L., 2012. Trust and credit: the role of appearance in peer-to-peer lending. The Review of Financial Studies, 25(8), pp.2455-2484.
Guiral, A., 2012. Corporate social performance, innovation intensity, and financial performance: Evidence from lending decisions. Behavioral Research in Accounting, 24(2), pp.65-85.
Marqués, A.I., García, V. and Sánchez, J.S., 2012. Two-level classifier ensembles for credit risk assessment. Expert Systems with Applications, 39(12), pp.10916-10922.