What are the three C's of credit?

The correct answer, which includes Character, Capacity, and Capital, focuses on the essential factors that lenders assess when evaluating a potential borrower's creditworthiness.

Character refers to the borrower's reputation and track record for repaying debts. Lenders often look into credit history to determine whether the borrower has been reliable in managing past loans and financial obligations. A positive credit history indicates that the borrower is likely to fulfill future commitments.

Capacity assesses the borrower's ability to repay a loan based on income and existing financial obligations. This usually involves analyzing the borrower’s employment history, debt-to-income ratio, and overall financial stability to ensure that they can handle monthly payments for the requested loan.

Capital, the third C, encompasses the borrower's investments, savings, and assets that can contribute to the overall financial picture. It indicates the amount of money a borrower has invested in a property or business. A borrower with significant capital is considered less risky since they have their own financial resources that can support loan repayment.

Understanding these three C's is crucial for both borrowers and lenders because they provide a comprehensive assessment of financial health and risk, which directly impacts loan approval and terms.