A bank looks at 5 things when deciding whether or not to approve a loan, called the “Five C’s of Credit”:
- Credit History: This tells them how consistently you’ve made payments on any loans, credit cards, or mortgages in the past.
- Capacity: The bank estimates how consistently you’ll be able to make payments based on your income and other financial responsibilities.
- Collateral: Any assets you own, like a car or a home, that the bank could take if you fail to pay.
- Capital: Capital is usually the money you have in savings, investments, and retirement accounts that you could use to pay the bank if you can’t repay the loan.
- Conditions: The things a bank looks at before approving your loan, such as the market conditions or state of the economy and other things that might affect how you can repay the debt.