What Do Banks Look For When Lending? The “5 Cs” Of Credit!

Automotive Finance, Credit Education

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If you have a bad credit score, you may be wondering how banks determine whether or not they’ll lend you money. It’s true, bad credit can make it quite hard to get a bank loan – but your credit score is only part of the picture.

When you apply for a loan, banks are assessing you for risk. They want to know if you can afford the loan you’re asking for, and if you can pay it back. That’s why credit score is such an important component of lending – it offers a quick, “at-a-glance” way that lenders can see your financial history. However, banks rely on more than just your credit score.

Let’s discuss the “5 Cs” of credit now, so that you can understand why banks may accept – or reject – your loan application!

1. Credit History

Okay, this first one isn’t surprising. This is the first thing that a bank will look for when you apply for a car loan or a similar financial instrument.

Your credit history contains information about past debts, loan repayments, accounts sent to collections, foreclosures – just about everything related to your past financial history.

If you have good credit and a history of repaying your loans on time, that might be enough for them to approve you for a car loan right away! However, if you have bad credit, they’ll likely have to understand your financial standing more thoroughly before they’re willing to issue a loan.

2. Capacity

Capacity is the next “C” of credit. Essentially, capacity is what banks use to determine whether or not you could comfortably afford payments on a loan. To do so, they may require proof of income and proof of a steady employment history.

They will also compare any debt you have to your current income, and determine whether or not you have the capacity to pay a loan.

For example, if you make $4,000 a month, and you have $1,000 you can spend each month after expenses, a loan is likely to approve you for a loan with a $500 monthly payment.

However, if you make $2,000 a month and only have around $600 monthly spending money, a bank will be wary of that same $500 loan – because it’s likely that, at some point, you may be unable to pay.

That’s basically it for capacity – by measuring your debt, expenses, and income, banks will determine whether or not you can actually make your monthly loan payment.

3. Collateral

Collateral is usually only necessary when applying for secured loans like a mortgage. However, lenders will often offer a lower rate on other loans if you offer up collateral – because this is a way of securing the loan.

Essentially, when you offer up collateral (such as a home) on a loan, the bank has the right to seize that property if you don’t pay. This allows the bank to offer more attractive interest rates, because they know that they will be able to reclaim their money in case of nonpayment.

However, this is quite uncommon for car loans – car loans usually have the vehicle itself as collateral. If you don’t pay, the bank will simply take the car, so there’s no need for additional collateral.

4. Capital

Although your income is expected to be the primary way through which you repay a loan, assessment of your overall capital – including savings, stocks, bonds, investments, and more – can be factored into your loan.

If you have a lot of liquid capital – money that can be used to pay a loan in an emergency such as job loss – banks are more likely to lend to you. They’ll know that you can pay your loan for a set period of time, even if you experience some serious life setbacks.

5. Conditions

Banks don’t just issue loans to anyone. A loan must have a clear purpose – and the conditions such as the purpose of the loan (buying a car, renovating a home), current economic conditions, and current financial standing of the bank will be considered.

Together, these conditions can help banks make a smarter lending decision, and ensure that they make wise investments that will be paid off in a timely fashion.

Be Prepared – Understand The “5 Cs” Before Applying For A Loan!

Each one of the “5 Cs” is important for the lending process – so understanding them is critical to getting a loan with favorable terms. Whether you have bad credit or good credit, understanding the “5 Cs” can be very useful when you apply for a loan.

Got bad credit? Need a car loan in Winnipeg? Ride Time is the place for you! At Ride Time, we make it easy to get approved for an auto loan – even if you have bad credit!

Our team of 15+ lending partners can almost guarantee you a loan – just prove that you make $1,500 a month before taxes, have a valid Canadian licence, and have been employed for 3+ continuous months!

If you can give us that information, we’ll work with you to find a fantastic car that’s perfect for your needs – and an auto loan from our lending partners that’s reasonable and fair, based on your credit situation.

Don’t wait – and don’t get stuck without wheels! Come to Ride Time now, and we’d be happy to help you find the used car of your dreams – whether you have good credit, bad credit, or no credit at all


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