JOIN USThe Indian economy has experienced a phenomenal shift towards consumerism in the last three decades, largely driven by a surge in the disposable incomes and a burgeoning middle class. As we move towards the credit-driven mindset, gone are the days when we would save for months or years to buy what we wanted outright.
In our current environment, we buy almost everything on credit. Be it electronics like smartphones and televisions, assets like vehicles and homes, or even vacations for that matter. One would think that everyone knows what goes into securing credit in the form of a credit card, personal loan or home loan, but in truth, very few people really understand these parameters or how they can improve their chances of getting a loan.
One common issue is that loan applicants fail to properly prepare and only realise the vast requirements after applying for a loan. The end result could be rejected applications, higher interest rates or lesser amounts sanctioned.
What do banks and lenders look for
in applications? There are three basic things that matter to your loan application when being evaluated by a bank.
Regular income
Since loan repayments are made in equated monthly installments, banks and lenders will need you to have a regular source of income that can guarantee enough inflow to pay your loan installments.
Documentation proving identity, address, income and assets
Providing proof of income, identity and address helps banks validate applications for unsecured loans. In addition to the aforementioned, secured loans may require further documentation proof of property or vehicle ownership as collateral.
Credit score and credit report
One of the most important criteria of evaluation in the current scenario is your credit score and report, which has a 70 to 80% weight in the evaluation of your application.
Credit reports are compiled by Credit Information Companies (CICs) or Credit Bureaus that collect your payment history on existing credit cards and loans from all banks in the country. Information in a credit report is computed into a numeric score, which represents a borrower’s riskiness. Generally, financial institutions prefer scores above 750.
Lenders will check a loan applicant’s credit score and report to get an objective assessment on his or her financial riskiness, based on the amount of debt they currently have and the regularity of their previous payments. Since credit reports provide comprehensive information to financial institutions to determine loan eligibility, it is imperative that your report accurately reflects your current financial status.
While lenders use complex formulas in order to determine your eligibility, there is a simple process you can follow to evaluate your own eligibility and best position yourself for approval:
Understand your eligible amount
Lenders assume that you will require half of your income to survive and half of it can be spent repaying credit. Start by dividing your income into half and subtract any existing payments from this amount. The amount you are left with can be used to calculate your loan eligibility using different multipliers for different types of loans.
Home loan – Multiplied by 100 (for a 15 year tenure at 10% interest)
Auto loan – Multiplied by 30 (for a 4 year tenure at 14% interest)
Personal loan – Multiplied by 20 (for a 2 year tenure at 17% interest)
Maintain a healthy credit history
Strange as it sounds, some lenders will not lend to you if there is no previous payment history to evaluate. When banks assess a credit report they will want to see a year or two of regular payments before being willing to finance you further. It is therefore important to have a credit history which can reflect positively on your report.
Maintain a healthy credit score
Your credit score merely reflects your credit history, which means you can always improve it. Make sure you repay loan installments on time and work towards eliminating any delays that impact your score.
(The writer is VP and Head, Direct to Consumer Interactive, TransUnion CIBIL)