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Four C’s Of Credit: How Banks Determine If They Should Accept Loan Applications

Getting approval for a loan application is no easy task. Everything needs to be perfect.

And to be honest, banks aren’t entirely to blame either. After the 2008 financial crisis, the banking sector has become far more regulated. The lending criteria for banks have also become stricter.

There are certain factors that banks take into account when they’re reviewing loan applications. These are collectively referred to as 4 C’s of credit. Let’s take a look at these:


The first C of credit is ’character.’ This means that banks assess an individual’s character and determine if they are likely to return the borrowed amount or not.

They start by researching your credit history. They’ll see if you have ever defaulted on your payments in the past. They‘ll also check your credit score. If you have a low credit score, the bank is likely to reject your application.

The thing about credit scores is that they can be improved over time; so even if you have a bad score currently, you can work towards improving it at a later date.


Capacity refers to a person’s ability to pay back the borrowed amount. It determines a person’s capability to pay back the loan by assessing their current income level and their debts.

Lenders use the debt to income ratio to do so. They add together all the debts of the applicant with their income. A low debt to income ratio will increase your chances of getting the loan.

Ideally, you should have a debt to income ratio of 43% or lower in order to secure the loan. However, there have been cases where banks have accepted loan applications at a higher rate as well.


Capital refers to the money you have available at present. If you have adequate cash available, the bank will be more willing to accept the loan application.

The bank also checks the number of assets that you have. Again, the idea is that if you default on payments, the bank can ask you to dispose of the assets and recover their money.


Economic conditions play a huge role when it comes to loan applications. Just think of it this way, would any bank offer you a loan during a period of inflation.

In addition to that, conditions also refer to the reasons that people are applying for a loan.

We understand that getting a loan is not easy. But the good news is that you can still get a loan even after the bank rejects your offer.