What are the 4 Cs of Lending? They are tools used to evaluate a loan application and assist lenders in being advocates for the customer and for the lender. You cannot evaluate a loan application without the proper information.



What are the 4 Cs of Lending? They are tools used to evaluate a loan application and assist lenders in being advocates for the customer and for the lender.

You cannot evaluate a loan application without the proper information. You need information, verified to the point of reliability, in order to:

  • Do the best job you can for your customer.
  • The loan officer needs to do the best job they can do for the lender.


The 4 Cs of lending are:

  • Capacity
  • Credit
  • Collateral
  • Character


4-c-lending-2The 4 Cs, or 3 Cs if an application is unsecured, can be viewed as the legs to a stool. If all legs are solid, the loan should ‘stand’ strong and is able to be approved. Conversely, loans with weak or shaky legs require attention to see if the loan should be approved.

The four Cs are the basis for underwriting loans.

Capacity: (Income)

How is the applicant going to meet their monthly obligation to make the new loan payment?

Stable monthly income is defined for loan underwriting purposes as the gross monthly income or base earnings from primary employment plus other acceptable sources of secondary income. Both income from employment and acceptable secondary sources of income including bonuses, commissions, interest and dividends or part time employment income should be substantiated from prior earnings and deemed likely to continue in order to be considered stable.

Income from alimony, child support and separate maintenance payments will be considered stable income only if the applicant chooses to disclose this income and it is deemed likely to continue. Income from pensions, social security, public assistance, welfare, and disability or survivorship benefits will be considered as stable monthly income if the payments are received pursuant to a written agreement, are received regularly and are deemed likely to continue. Amounts will be adjusted to reflect gross income standards.


Credit is not just a score. The score is part of the lenders toolbox to analyze the report. The rest of the toolbox is based on using the loan officers knowledge and experience to analyze what the credit report tells you.

Each borrower on a loan should have an acceptable credit reputation.

An acceptable credit record is established by a history that, when viewed as a whole, evidences a borrower’s willingness to make ongoing payments and the ability to manage obligations as agreed. The acceptable credit reputation of one borrower should not be used to offset the unacceptable credit reputation of another. Co-applicants or co-signers do not fix an applicant’s bad credit.


Assets pledged by a borrower to secure a loan, which are subject to seizure in the event of a default in the repayment or other terms of the loan.

Identifying, Valuing, and Securing acceptable collateral is an integral component of the loan process. The loan officer will ensure collateral is properly evaluated and secured.


Dictionary Definitions:

  1. The set of qualities and traits that form the individual nature of some person.
  2. Ethical or moral quality.
  3. Public reputation.
  4. Qualities of honesty, courage, integrity, and the like.


4-c-lending-3The melting pot of the 4 Cs.

There is no one document or measurement of character that a loan officer can reference to attempt to determine the character of an applicant, so it is sometimes paid limited attention by loan officers.

The Character of an applicant may be a greater indicator that the loan will be paid as agreed than the other 3 Cs.

What are possible indicators of an applicant’s character?

Income related  :

– Time in employment position.

– Time with employer.

– Doesn’t job hop – are job changes for advancement?

– Lack of gaps in employment history.

– Increasing income from one year to the next.

Credit Related:

– Credit report demonstrates how the applicant handles their financial obligations.

– Has the applicant overextended themselves?

– What type and amount of credit is the applicant using?

– What amount of unsecured credit does the applicant carry?

– What are the balances of revolving accounts vs. the available balances?

Wrap Up:

– You know the CAPACITY when applying for a loan .

– You know your CREDIT history and payments affecting your credit.

– You know the value of the COLLATERAL that you are buying

– Your loan officer will determined the CHARACTER of your loan through the application process.

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