The All Important THREE C's of Lending!

So what are the 3C's?

• Credit
• Capacity
• Collateral

Credit and Character

This is all about trust. It’s like when you lend a favorite possesion to a friend because you trust them to take care of it and return it. Banks do the same thing. They look at your credit history, employment duration, and sometimes even references to determine if you’re trustworthy.

Use of the word "character" is a misnomer. They are mostly looking at your credit and credit score to determine your Financial Character. They do not care if you are good or bad, holy or evil, it is all about money and stability in that order of importance.

What is Capacity

This is your ability to repay the loan. It means your income and more specifically your DEBT TO INCOME RATIO. It’s like making sure your friend from earlier isn’t already borrowing too many things from other people before you lend them yours. Banks look at your income, the number of outstanding loans you have, and your living expenses to determine your Debt to Income Ratio.

The ability to prove your income with documanteation such as paystubs, W2's or bank statements can qualify you for more financial products and typically give you much more favorable terms on a loan.

What is Collateral?

This is something of agreed upon valuable that you promise to give to the lender if you can’t repay the loan. It’s like telling your friend that if you don’t return an item that you borrowed from them, then they can keep something of yours usually of similar value. For banks, collateral could be a house, car, or other valuable assets. Not every loan is secured by collateral but typically having collateral on a transaction gives you more favorable terms.

Remember

The 3 C's are what lenders are looking at to determine if you are credit worthy or not. The more documantaton you have to prove The 3 C's to a lender the more favorable the terms you will be offered when applying for credit.