Finance (FINC) Test 2 Practice

Lenders assess creditworthiness by weighing several factors that signal the borrower’s ability and willingness to repay. These factors are often grouped under the five Cs of credit, and among them capacity, character, and the loan conditions are key. Capacity focuses on income and debt obligations—can the borrower generate enough cash flow to cover payments? It looks at earnings, job stability, and the debt-to-income ratio to judge whether there’s room in the budget for new debt. Character is about the borrower’s past behavior with debt—credit history, payment history, and reliability. A track record of paying on time suggests a higher likelihood of future repayment. Conditions cover the broader environment and terms of the loan—economic conditions, industry trends, and the purpose or terms of the loan. These factors influence how risky the loan is and how likely repayment remains under various scenarios. Since all of these areas contribute to assessing risk, the best answer is that all of the above are major factors lenders use to evaluate creditworthiness. A borrower who demonstrates solid capacity, good character, and favorable conditions presents less risk to the lender.