The 5 Cs of Credit: How They Affect Your Loan Application

How many times have you applied for a loan only to be rejected often? While most banks and licensed moneylenders won’t disclose the reason, you can assume that you didn’t meet one of the 5 Cs for creditworthiness.


No, the standards aren’t the same with the so-called 5 Cs of success that comprise cash, car, credit card, condominium and country club membership as defined by Singaporeans. Financial institutions review an application based on your character, capital, collateral, condition and capacity.

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Why Are There 5 Cs and Not 4 or 6?

Lenders in Singapore use five benchmarks because these are enough to determine your creditworthiness. However, the qualitative and quantitative Cs may not always apply to each borrower. 


For example, banks and licensed money lenders won’t use the collateral aspect for their reviews if you take out an unsecured personal loan. Each of the 5 Cs will be relevant once you apply for a housing or vehicle loan.

Your Character Is Likely the Most Important

Having no credit history is often better than having a poor payment record, but financial institutions still prefer borrowers with documented proof of their timely debt payments. 


Lenders usually check your character before the other 5 Cs, as this provides them with an idea of how you would repay the loan. If you don’t have any records, they may not approve the loan based on good faith alone especially when you apply for a high amount.


Those who don’t like to apply for personal loans just for building their credit histories may apply for credit cards instead. Choose one that fits your lifestyle and income and do your best to pay in full and on time every month. 


Defaulting on a loan is the easiest way to be rejected for future applications. Financial institutions may even include you to blacklisted borrowers.

Your Financial Capacity

Capacity refers to your ability to repay the loan by reviewing your income versus recurring loans. Your debt-to-income (DTI) ratio also matters too. You can determine your DTI by dividing your total monthly debt by your gross monthly income. Look at the scenarios below:

  1. John Doe earns $2,000 every month. His recurring monthly debt costs $1,000, which results in a DTI of 0.5 or 50% using the formula.

  2. Jane Doe earns the same monthly income. Her recurring debt costs $500, which results in a DTI of 0.25 or 25% using the formula.

Jane Doe will have a better chance of approval for a new loan based solely on the aspect of financial capacity. That’s because most financial institutions want a borrower’s DTI to be 35% and below to qualify for new financing.

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The Quality of Collateral

As mentioned earlier, borrowers don’t need collateral for unsecured loans. Once you apply for a home loan or vehicle financing, the quality of your collateral will come into play. 

Secured loans often have lower interest rates and more flexible payment terms, as lenders have more assurance of covering their financial loss in case you default on your loan.

Capital Is Also Known As Your Contribution

If you plan to apply for a car or housing loan, the amount of your down payment will be used as a benchmark for approval. You have a better chance of qualifying if you make a 20% down payment than 10%, as this indicates your willingness to reduce your risk of default.


Small business owners who apply for commercial loans should also pay attention to their capital. If they have negative equity (total liabilities cost more than total assets), it can be very difficult to acquire new financing. 


For personal loan applicants, financial institutions may review your desired loan principal. Is your annual income below $30,000 and yet you’re applying for a $20,000 personal loan? You may have a tough time with your application in this case.

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The Conditions for Getting a Loan

Personal loans can be used for any purpose, but lenders may still ask for a specific reason before they approve your application. Are you taking out a loan to pay for other loans? You should consider a debt consolidation plan instead. 


The conditions for obtaining an unsecured personal loan influence a bank or licensed money lender’s decision, aside from other factors such as economic and regulatory changes that are beyond your control.

What to Do to Build a Good Credit Score

You should pay your credit card bills in full before the end of each billing cycle. It won’t just improve your credit score but also lets you avoid paying steep interest charges. 

Aside from timely and full payments for loans and credit cards, you should also avoid applying for too many credit facilities within a short time.If you just received a new credit card, don’t apply for another one after a month or two. By doing so, your credit score will be affected negatively. 

Banks may think that you are financially struggling when you need a new line of credit immediately after your new card. It’s best to wait for at least six months to a year. 

You should also avoid having too many open credit facilities even if you have an above-average income. Your probability of default increases when you have a lot of debt.


The next time you apply for a personal loan, you’ll have better chances of approval if you improve your creditworthiness based on the 5 Cs. A good credit history is not only important to qualify for low interest rates. It can also make or break your job application, as some employers particularly in the finance sector may ask for your credit score. 

Visit our website now to find out more, or check out our recommended financial institutions if you are looking for the best moneylender in Singapore.

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