Have you ever heard of “The Five C’s?” It was once how banks judged creditworthiness (back when they used to do that sort of thing.)* The idea is that the lender can judge the chance that the prospective borrower might not pay by evaluating these 5 qualities:
- Character: Does the borrower intend to pay the loan back? Do they have the discipline to make regular payments, even if times get tight?
- Capacity: Does the borrower have the wherewithal to make the payments?
- Capital: What if something goes wrong, do you have enough savings (capital) to make it through tough times? Do you have enough capital to care for the collateral?
- Collateral: Is there any property that can be pledged to back the loan if the borrower fails to repay the loan?
- Conditions: What are the economic conditions that affect the borrower, and can the borrower withstand conditions that move against them? Also, what are the conditions of the loan, such as rate and payment schedule?
That’s how banks used to roll. Now-a-days the credit score and credit report has insinuated itself into the process, and the rest of the evaluation is based on meeting a bank’s internal lending requirements and making the loan conform for resale. That’s fine, if that’s what the bank chooses to do with its money, but what it means for you is that you credit record and credit sore will disproportionately affect your ability to borrow money.
Funny thing, a long time ago, bankers were expected to be able to evaluate the merits and creditworthiness of a loan and borrower directly and in person. People would go to their bank and consult “their banker” just like a person would consult their accountant or financial planner today. Would you go to the bank to consult your banker today?
I suspect that the relentless effort of banks to sell products has degraded the quality of bankers – at least the one’s I’ve spoken to. Back then, bankers had to be highly knowledgeable and involved in their community. Now, the “personal bankers” I speak to are hired from the ranks of sales people and they are paid and judged by their ability to put a consumer in a product.
I sound curmudgeonly enough, so I’ll quit before I start yelling at kids to get off my lawn. So remember, tend to your credit score if you intend to borrow money, and before you sign a loan, take a moment to consider your five C’s.
* Yeah, I’m being a little catty, but they’re big banks. They can soothe themselves by taking a swim in their money bins à la Scrooge McDuck.