What does the term 'Capacity' refer to in the 4 Cs of lending?

In the context of the 4 Cs of lending, 'Capacity' specifically refers to the borrower's ability to repay the loan. This evaluation involves analyzing the borrower's income, employment stability, and existing debt obligations to determine whether they have sufficient cash flow to meet the proposed monthly loan payments without straining their finances. Lenders assess capacity to ensure the borrower can manage the loan alongside their current financial responsibilities.

While other aspects like a borrower's experience in real estate, overall financial health, and credit score contribute to the lending decision, they fall under different categories. For instance, the borrower's credit score is considered part of their creditworthiness, while overall financial health includes assets and liabilities that provide a broader picture of the borrower's financial situation. In short, 'Capacity' is directly focused on the income and repayment capability, which is crucial for determining the borrower's likelihood of making timely payments on the loan.