Which set comprises Character, Capacity, Capital, Collateral, and Conditions in credit evaluation?

• A. Five C's of Credit
• B. Steps of Loan Processing
• C. Financial Ratios
• D. Credit Scores

Answer: (A)

In evaluating a loan, lenders assess risk across five key areas, which together form the Five C's of credit: Character, Capacity, Capital, Collateral, and Conditions. Character looks at the borrower's trustworthiness and history of repaying debts, including credit history and reliability. Capacity focuses on the borrower's ability to repay given income and existing obligations, often measured by debt-to-income ratios and job stability. Capital refers to the borrower's financial resources and net worth, where more resources reduce risk for the lender. Collateral is an asset pledged to secure the loan, providing protection if the borrower defaults. Conditions consider external factors that could affect repayment, such as the overall economy, industry trends, and how the loan will be used. Together, these dimensions give a comprehensive view of credit risk, which is why this set is the standard framework for credit evaluation.

The other options don’t describe this evaluative framework. Steps of Loan Processing outline the sequence of actions in making a loan, not the risk factors considered in creditworthiness. Financial Ratios are specific numerical measures of financial health, not a broad framework for assessing a borrower. Credit Scores are a single numeric indicator of credit risk, whereas the five Cs encompass multiple qualitative and quantitative angles.