Banks and NBFCs offer all kinds of loans to their customers- personal loans, home loans, business loans, etc. However, irrespective of the nature of a loan or its size, there is always some level of risk when it’s approved by a loan officer. This is why the banks consider several factors when someone applies for a loan. These are:
1. Credit Score
In case you don’t know, getting a loan for low Cibil score can be a herculean task. This is because credit score is the most important thing that a bank checks when it evaluates a loan application.
Your credit score signifies your creditworthiness. So, the higher is the score, the more you are “worthy” of receiving credit. This is because the score itself is calculated on factors like your repayment history, existing debt, credit utilization ratio, etc. If you have paid other loans in the past on time and without defaulting with any, then your score will be high, and it will let the bank know that you can be trusted with a new loan.
If you don’t know what your existing credit score is, then you can download your credit report online which can tell you the score and other important details as well which include your repayment history about loan EMIs and credit card bills, number of loan inquiries made recently, etc. You may also qualify for a free Cibil report if you didn’t download the report this year earlier. This is because as the per the norms of the central bank, all credit rating agencies are required to provide one free report to each user every year.
You can’t take a massive loan with EMI of Rs. 30,000, when you are earning 40,000 a month. In other words, your income should be high enough to accommodate the EMIs of the loan you are interested in and also have room for your household expenses. There should be enough margin between the EMI and income so that the bank can have the assurance that you can easily pay the EMIs even if there is a financial emergency and you need to spend a portion of your income for that.
3. Debt-to-Income Ratio
If you are already repaying a loan, then the same is also taken into consideration during the analysis of your loan application through debt-to-income ratio which is self-explanatory. Again, this has to do with basic logic. If you are already paying the EMis of two loans and your income is just high enough to accommodate them and your expenses, then there won’t be room for another EMI. So, a bank won’t approve a loan knowing that you are earning barely enough to get by. You can find all the details regaring this in your free Cibil report.
4. Repayment History
When a bank approves a loan, they want the borrower to pay it back on time. This is because it’s not just about one borrower- there are hundreds of them in their portfolio. This is why if there are a large number of borrowers that delay payments, then it can affect the cash flow of the entire institution. So, the banks check the credit report of applicants to ensure that they have paid most of the EMIs, if not all, on time without delays. This is the reason why it’s so difficult to get a loan for low CIbil score and you have to take personal finance seriously to be financially secure.
If you own assets like stocks, real estate, jewelry, then you can get a loan by offering them as collateral. When you get a loan under this arrangement, then it’s called a secured loan for obvious reasons. In fact, a secured loan is easy to get compared to traditional loans as the bank can sell off the assets in case the borrower is unable to repay the loan. So, it’s easier for them to approve the loans. That said, these loans are risky for the borrowers because if you are unable to pay the loans, then you can lose your prized possessions.
So, these were some of the factors that lenders consider when they check loan applications. Do note that your credit rating is the most important factor here. So, make sure that you increase it as much as possible before you send the application.