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The 5 conditions for obtaining loans

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Do you need funds to start a business? Do you need money to expand your business? You might consider taking a loan from a bank . The 5 c’s of credit refers to the five parameters used by banks to determine whether a loan request should be approved or not. Simply put, it is used to determine if a person is worthy to receive a loan from a bank.

The 5 c’s of credit are credit , collateral, capacity, character and condition. For better understanding, we will be looking at these parameters or requirements individually.

This refers to the credit score of the borrower which reflects their ability and willingness to repay the loan. A credit score can be defined as the credit history expressed as a number . You can also think of it as a grade for how responsible you have managed your loans or debts. Banks and other financial institutions such as insurance companies check your credit score in order to come up with a credit rating for borrowers which helps the banks or financial institution take a decision on the loan request.

A collateral is an item that belongs to the borrower that can be used as an exchange for the payment of the loan if he cannot pay his loan at the required time. It can also be defined as a property or goods used as security against a loan and forfeited if the loan is not paid. Collateral provides some security to the banks when they are giving out high amount of loans to the borrowers. It provides some form of comfort to the banks as they will be able to recover either part of the loan or all of it when the collateral is sold in case the loan is not repaid. Examples of collateral are landed properties, real estates ,shares or stocks certificates.

Capacity refers to the money generated by the company or business in order to repay the loan and interest within the time stipulated in the loan. Banks sometimes ask the borrower to submit their financial records to them for it to be evaluated by their auditors to know if such company or individual can make enough money to cover the loan and interest within the time agreed upon, for the repayment of the loan and accrued interests.

Banks refer to previous track records of the borrower (company owners or individual) and their willingness to repay the loan amount given to them by their previous lenders. Banks only provide loans to people with sound character who can be trusted to honor their commitment to repay their loans.

Condition has to do with the current business operational status. Banks normally hesitate to provide loans if the current business situation is not favorable. For example in a time of recession , it will be difficult to obtain loans from banks. The profitability of the company at the time of the loan application also falls under this category. Banks also consider the viability of the sector the business is operating under or in the case of individual, the sector he wants to go into at the time of the loan application before the loan can be approved .

For you to qualify to obtain a loan from a bank or financial institution, the above parameters must be met satisfactorily.

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