If you care about maintaining positive relationships with colleagues, friends, or family members, you should never lend them money because the risk of not being repaid on time will destroy those bonds.
So, how can you avoid it? That is simple: give the money as help, but do not make a loan to him or her. And you will surely keep your relationship and avoid becoming unnecessary enemies.
Perhaps you have experienced that inconvenience with a friend already. That’s okay; you can call it a lesson learned. Therefore, allow me to share with you the 5 Cs of Creditworthiness that you must consider before lending.
Lenders, or moneylenders, have utilized these 5Cs for years, and these have minimized the risk and stress that come with disappointment when moneylending to people. It is a fact that people will always disappoint.
Here are the 5 Cs of creditworthiness:
First, character; second, capacity; third, capital; fourth, collateral; and fifth, a condition. Please walk with me. I will explain them in the paragraphs that follow.
I have arranged them in the order of assessment and importance when assessing the lender or a lender. He or she must meet these criteria, which I will briefly explain what they stand for and why the 5Cs are vital for assessing a borrower before lending him or her your hard-earned money.
The 5Cs of Creditworthiness are simply sets of criteria that lenders utilize to assess the creditworthiness of individuals or businesses. These criteria help lenders determine the likelihood of a borrower repaying their money on time as pledged.
Let us look at each one of them one by one.
Character refers to the borrower’s image, reputation, and trustworthiness. Is he or she a trustworthy person? Will he or she repay the money? Therefore, you, as the owner of the money or the lender, must take a keen interest in assessing the borrower’s credit history, his or her payment track record, and overall financial responsibility before committing your money to him or her.
Capacity: Capacity is another important element to consider. Here you should focus on the borrowers’ ability to repay the money or as the lender, you must assess the borrower’s income, employment stability, and debt-to-income ratio to determine if they have sufficient cash flow to meet their financial obligations.
Capital refers to the borrower’s financial resources and investment in the loan. Lenders consider the borrower’s savings, investments, and other assets to assess their ability to handle financial setbacks and repay the loan.
Collateral: Collateral is basically security. Here, you look at assets or property that a borrower promises or pledges to you as the owner of the money as security for a loan. For instance, collateral provides a form of protection for the lender in case the borrower fails to repay the loan.
Condition: Finally, let’s discuss the condition. It simply refers to the overall economic and industry-specific conditions that may impact a borrower’s ability to repay a loan. Here, a lender assesses the condition by evaluating factors such as the borrower’s financial stability, market trends, and the specific purpose of the loan. A borrower’s financial stability is determined by analysing their income, expenses, assets, and liabilities.
Copyright © 2023 by Stephen Omiri
