Harshala Chandorkar elaborates how bankers and other lenders evaluate one's loan application. She elaborates on how they rely on credit information reports to sanction loans.
Many people simply apply for credit without giving a second thought to how the lender might actually perceive their loan application. Credit Information Reports have been widely used by loan providers to evaluate loan applications for years now.
However, only recently have people begun to realize, how crucial it is to be aware of and maintain their credit history. If you have a good credit record then you have higher chances of getting your loan application approved. But for people who may not have the best borrowers profile; understanding how lenders look at the inherent risk of lending money will really help you improve your chances of qualifying for credit.
Thus, understanding how your credit data might be interpreted may give you a chance to improve your credit worthiness from a lender's viewpoint.
When you apply for a loan, lenders weigh a number of factors to determine if you are able and likely to repay the debt. Following are the aspects that affect a lender's decision to approve or decline a loan application:
• Capacity - What is your ability to repay the loan? Do you have a steady job or another source of income? How many other loan payments do you have, and what impact do these payments have on your monthly income? Is your income sufficient to cover your contractual obligations, as well as those other day-to-day expenses?
• Credit Usage - Have you used credit before? Do you pay your bills on time? Do you have a good credit history?
• Collateral/Capital - Do you have other assets which could act as a secondary source of repayment, such as a savings account, car, or certificate of deposit?
Most lending institutions avail credit information reports of all loan applicants in order to analyze borrowers’ credit history to help them make a better lending decision. An individual’s Credit Score is calculated basis the information in the “Accounts” and “Enquiry” section of the credit information report and ranges from 300 to 900.
The closer your credit score to 900, the more confidence the credit institution will have in your ability to repay the loan and hence, the better the chances of your application getting approved. However, CIBIL does not pass any value judgement regarding disbursal of loans. It is solely a provider of information to member banks. Depending on their respective risk appetite, banks have in place their own cut-off credit scores for providing loans.
Understanding the CIBIL credit information report helps you identify the right time in your financial life cycle to apply for a loan. It is important for you to regularly review your credit information report in order to determine if the information is correct.
Listed below are the most important attributes looked at by a loan provider while evaluating your credit application:
1. Payment History: This appears in the Account(s) section of your CIBIL credit information report. There are 2 parts to this information: the Days Past Due (DPD), and the month and year of payment that reside here.
The DPD indicates how many days the payment is late that month. Anything other than “000” is considered negative by a Loan provider. Up to 36 months of this payment history (with the most recent month displayed first) are provided in this section.
2. Current Balances: Also appearing in the Account(s) section of your credit information report, the current balances on various loans indicate the depth of your debt.
The sum of your current balances helps a Loan provider determine your strength to take on additional EMIs, in relation to your current income. Naturally, lower the current balance, the better the chance of your loan getting approved.
3. New Credit Facilities: If a loan provider observes that you have recently been sanctioned a number of new credit facilities, it would mean that your monthly outflow in terms of EMIs, are likely to have increased. Hence, it may have a negative impact on your loan application.
4. A number of new Enquiries: If you have applied for a number of loans in the recent past, the chances of your loan getting approved are likely to suffer. Simply because, this credit behaviour indicates that you are “Credit Hungry” and in an urgent need of money. It is likely to make Loan providers more cautious while evaluating your credit application.
By understanding how banks think you can not only complete a lending application that will showcase your strengths better but you can also pre-qualify for your loans / credit cards basis lender’s criteria and reduce the number of attempts you make to qualify.
By making fewer attempts to qualify by applying at more than one financial institution you reduce the short-term damage to your credit prospects.
Thus, if you are planning to apply for any sort of credit facility for a purchase (home or car) in the near future, it is imperative to check your CIBIL credit information report 2-3 times each year and ensure that your ‘Reputational Collateral’ is reflected accurately. This will provide you with access to credit faster and at better terms.
The author is the senior vice president- consumer relations at CIBIL.
India Union Budget 2019: What does Finance Minister Nirmala Sitharaman have up her sleeve? Click here for top and latest Budget news, views and analyses.