The Four Cs of Credit
The Four Cs of Credit — Capacity, Character, Collateral, and Capital — form the foundational framework used to interpret lending risk across residential, commercial, and asset finance. They describe the core dimensions lenders assess when determining whether a credit obligation can be sustained, secured, and managed within institutional policy over time. While terminology andocumentation vary between institutions, this analytical structure remains consistent throughout Australian lending practice. This page explains the foundational logic of credit assessment. The broader institutional framework is described in:
Capacity
Capacity refers to a borrower’s ability to service debt under lender assessment rules rather than observed day-to-day cash flow.
Assessment commonly considers:
- income recognition and stability
- living-expense measurement
- existing liabilities and commitments
- servicing buffers and stress testing
Capacity is assessed conservatively and may differ from a borrower’s actual surplus cash flow.
Character
Character reflects behavioural and credit risk as evidenced through documented financial conduct.
Assessment may consider:
- credit history and repayment behaviour
- consistency of employment or income sources
- explanations for anomalies, arrears, or structural change
Character is not subjective reputation. It is inferred from verifiable financial patterns over time.
Collateral
Collateral refers to the asset offered as security for the loan and the lender’s ability to rely on that asset if repayment fails.
Assessment considers:
- property or asset type and permitted use
- location, marketability, and valuation stability
- liquidity and enforceability under stress
Assets of similar value may carry materially different risk treatment depending on these characteristics.
Capital
Capital reflects the borrower’s financial contribution and resilience to disruption following settlement.
This includes:
- deposit origin and genuine-savings evidence
- existing equity position
- post-transaction liquidity and financial buffers
Capital influences both risk exposure and access to particular lending pathways.
How the Four Cs Work Together
The Four Cs are assessed collectively rather than independently.
- Strength in one dimension does not eliminate
- structural weakness in another.
- Risk is layered rather than averaged.
This explains why borrowers with similar income or assets
may experience different lending outcomes under the same
institutional framework.
How this page fits within Model Mortgages
This page explains the foundational logic of lending assessment.
To see how these dimensions are measured in operational detail:
To see how lending outcomes arise in real-world borrower contexts:
→ Explore Canonical Lending Questions
Scope of this page
This page explains lending-risk assessment in principle only.
It does not:
- assess individual circumstances
- recommend lenders, products, or strategies
- provide personal credit or financial advice
Understanding the framework is separate from
having an individual lending situation assessed.
General information only. No personal advice is provided.