Factors on which lenders decide to give you loan.

After you apply for a loan, lenders estimate your credit risk based on a number of factors, like your income, financial situation and credit/payment history. These factors also known as ‘5Cs’ are explained below:

Credit history:
Qualifying for any type of credit largely depends on your credit history- which is the line of credit you've made by making timely payments and managing your credit efficiently. Your credit report consists of your credit history based on the information provided by creditors who have extended credit to you at a point of time. While one credit reporting agency’s information may vary from the other, all of them usually have the same information i.e the types of credit, payment history, lender’s names who have extended credit to you and more.

The lenders may also use the credit score given in the credit report. It serves as an indicator for the creditors about the credit risk involved. Usually higher the credit score, lower is the risk.

Capital:
Household income is expected to be the primary source of repayment in the cases of loans but in the cases where the person loses the job or experiences setbacks, capital helps repay these loans. Capital is the investments, savings and other assets which can help in repaying the loan. Thus capital plays a factor in the lending decisions too.

Capacity:
Creditors need to ascertain whether you can manage your payments comfortably or not. Your employment history and past incomes are a good way to determine your ability to pay off outstanding debts. Type of income, stability and amount of income can be considered. Debt-to-income ratio (DTI) which is the ratio of your current and new debt, as compared to your before-tax income, can be evaluated.

Conditions: 
Your plannnig of how to use the money also forms a part of the lender’s decisions. The loan’s purpose on whether it is for purchasing property or a vehicle is considered. Other than purpose, economic and environmental conditions are also considered sometimes.

Collateral (secured loans):
Credit cards, lines of credit or loans can be secured or unsecured. In secured, like a home or an auto loan, something you own has to be pledged as collateral. Value of the collateral will be evaluated, and past debts already secured by that collateral has to be subtracted from its value. The remaining value will play a part in the lending decision.

 The 5C's is a common term used in banking. Knowing these 5C's would help you better in answering questions the next time you apply for loan.

Source: Secondary