What does "character" refer to in the context of the 4 Cs of lending?

In the context of the 4 Cs of lending, "character" refers to the personal background of the borrower, which encompasses their credit history, reliability, and overall trustworthiness. Lenders assess character by reviewing the borrower’s past financial behaviors, such as their payment history on previous loans and obligations, as well as their overall financial responsibility. A strong character typically indicates that a borrower is likely to repay the loan as agreed, making them a more desirable candidate for lending.

While collateral pertains to the assets that can secure a loan, the income level relates to a borrower’s financial capability to make regular payments, and the repayment structure involves the terms under which the loan must be paid back, none of these elements directly address the personal traits and history of the borrower that character does. Ultimately, understanding "character" helps lenders gauge the risk associated with lending to a particular individual, which is critical in making informed lending decisions.