The Four Cs of Credit
The four Cs of credit — Capacity, Character, Collateral, and Capital — are the foundational framework used to explain lending risk.
They describe the core factors lenders assess when considering a loan.
This framework is correct and widely accepted.
Where confusion often arises is not in the framework itself, but in how these factors are applied, weighted, and constrained in practice within Australian lending policy.
Capacity
Capacity refers to a borrower’s ability to service debt under lender assessment rules.
This includes:
- income recognition and stability
- assessment of living expenses
- existing liabilities
- policy buffers and stress testing
Capacity is assessed conservatively and may differ from actual cash flow.
Character
Character reflects behavioural and credit risk.
Assessment may consider:
- credit history and repayment conduct
- consistency of income and employment
- explanations for anomalies or changes
Character is not subjective reputation. It is assessed through documented credit behaviour and patterns.
Collateral
Collateral refers to the asset offered as security for the loan.
Assessment considers:
- property type and use
- location and marketability
- valuation risk and liquidity
Not all properties are treated equally, even at the same price or loan-to-value ratio.
Capital
Capital reflects the borrower’s financial contribution and resilience.
This includes:
- deposit source and genuine savings
- equity position
- liquidity and buffers after settlement
Capital affects both risk exposure and policy access.
How the Four Cs Work Together
The four Cs are assessed together, not in isolation.
Strength in one area does not override weakness in another.
Risk is layered, not averaged.
This is why similar borrowers can receive different outcomes under the same framework.
How This Page Fits Within the System
This page explains the foundation of lending assessment.
To see how these factors are applied:
→ View lending scenarios in practice
What This Page Is — and Is Not
This page explains how lending risk is assessed in principle.
It does not:
- provide personal advice
- assess individual circumstances
- recommend lenders, products, or strategies