Lending
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Lending Questions to be discussed in this specific paper.
1. List the 5 Cs of Credit and describe each one of the Cs in your own words.
2. Using the 5 Cs of Credit as your guide, tell me the process you would follow in making a loan credit decision.
3. We have discussed a Loan Committee make-up and function in class. I want you to define the following jobs in that Loan Committee
a. Which member of the committee represents the customer or proposed borrower’s interest in that Committee Meeting?
b. Which committee member usually plays the Devil’s Advocate during the Presentation?
c. What is the normal role of the other Lenders in the room during the Presentation?
d. Which Committee Member usually has the biggest or most important say whether the loan is approved or not in the Committee?
Sample Solution
The 5 Cs of Credit are a set of five criteria lenders use to evaluate an applicant’s creditworthiness (Investopedia, 2021). These criteria include Character, Capacity, Capital, Collateral and Condition.
Character refers to the borrower’s trustworthiness and reputation (Investopedia, 2021). This criterion looks at the individual’s credit history along with any other personal or business relationships with banks and other lending institutions. The lender will take into account the borrower’s payment history on existing loans as well as how reliable they have been in repaying their debts.
Capacity is a measure of the borrower’s ability to repay the loan (Investopedia, 2021). This includes looking at factors such as current income level, job stability and debt-to-income ratio. The lender will want to make sure that the proposed loan amount is within reason based on what they know about your financial situation.
Capital refers to a person’s net worth or assets (Investopedia, 2021). This can include cash savings accounts or investments such as stocks or bonds that are easily liquidated in order to pay off any outstanding debts. Having capital helps show lenders that you have enough money available if something unexpected comes up or if you need additional funds for some reason.
Collateral is an asset used by the borrower for security against potential losses due to nonpayment of debt (Investopedia, 2021). For example, if you were taking out a mortgage loan then your house would act as collateral so that if you defaulted on payments then it could be seized by the lender in order to recover their money back. Other forms of collateral can include car titles or jewellery depending on what type of loan is being applied for.
Condition focuses on both economic conditions and industry trends when assessing an application (Investopedia ,2021). It takes into account things like prevailing interest rates, inflation levels and other changes in consumer spending such as unemployment levels which may affect repayment capacity down the line. Lenders also look at macroeconomic conditions like GDP growth rate so that they can better understand where economic activity might be headed over time before making a decision about whether or not someone qualifies for a loan.
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