Personal Finance presentation five C’s of credit capital, prepare to get financially fit by practicing personal finance. First we’ll take a step back looking at the five C’s of credit five C’s of credit commonly looked at from a financial institution when looking for a loan or financing five common things that it’s good to look at when assessing your own financial conditions. The five C’s include credit history, we looked at in a prior presentation, as we have with capacity and collateral.
This time we’re taking a look at the sea of capital. In a future presentation, we’ll look at the sea of conditions. So we’re looking at Capital here linters, evaluate the capital you have when you apply for large credit accounts like mortgage home equity or personal loan account. So they’re going to be reviewing the capital as one of the five C’s as one of the lending conditions.
Typically, capital represents the assets you could use to repay a loan if you lost your job or experienced a financial setback. So clearly on the lender side of things they’re trying to see they want to give you a loan because they want to be earning the interest on it. That’s how the institutions will be generating revenue on the financial institution side of things. They want to lower the risk, how can they lower the risk one ways they could say, well, do you have the compat Capital there in the event that you lost your income stream, so that we the financial institution can still get our loan payments, or at least the interest portion of them right,
as as the situation takes place, if some kind of emergency happened. So capital is typically your savings, your savings, investment, or retirement accounts. So these are types of things that of course, you could dip into, if necessary. So note, when getting a loan, your capital might be fairly limited, that’s why you’re getting a loan. But you could be in a situation where you have money in a savings account, but you don’t want to be dipping into the savings account, you want to be taken out a loan, or have the investments or of course, the retirement accounts, which might be locked under the umbrella of some type of retirement, such as an IRA, or 401k, or 403,
B or something like that. And therefore, you don’t want to take it out for the financing, but leave it in due to the tax incentives and the benefits you got putting it in there and not wanting to get the penalties of taking them out. But in the event of an emergency, they might be something that you could access, which could make the financial institution feel better that it’s there in the event that that takes place. But it may also include the amount of the downpayment you make when you purchase a home.
So when you’re thinking about the home, you wouldn’t typically think of that about that as the capital, possibly. But they’re saying if you have the downpayment on the home, that’s kind of the amount of the home that you could say, we know that you own that for sure. Now, you might even say that you can think about, obviously, the home value of the home minus minus the loan amount would be kind of your equity in the home, which you could think about as the value that you could you can possibly get access to in the event that you needed to.
But even that if there was an emergency or something like that, it would be it would be possibly difficult to access the entire equity in the home at that point due to other conditions being lower, being harder to get access to the full amount, but the amount that you actually put into the home, the downpayment of the home, then maybe that can be used as a more kind of conservative point that can be added to the capital, the amount of the home that you actually own, and that you actually basically paid for that amount of the home, yourself.
So capital, why it matters, capital matters, because the more of it you have, the more financially secure you are, and the more confident the lender may be about extending you credit. So clearly, if you have a better financial situation, meaning if you look at the balance sheet and essence, this is kind of a balance sheet type of calculation, assets minus liabilities is your net worth it worth, if your assets are greater, you know, the greater your assets are, then the more likely you are to be able to handle any kind of downturn, whereas normally so you can think about it.
Normally, when you’re looking at a loan situation, the person giving the loan wants to think, do you have enough income in order to pay for the excess loan payments? And if you do great, but what if there’s an emergency your income goes away? Do you have enough assets in order to still pay us? That’s when they might look at the balance sheet side of things for that added security?
Often people looking for a loan may not have a lot of capital on the balance sheet side of things. That’s why they’re taking out the loan possibly. But obviously if the more capital you have the more assurance the institution would have that you could pay off the loan in the event of an emergency in the event of income going down