The 4 Things That Affect Your Credit Score

It’s foolhardy to underestimate the significance of CIBIL score. You might be earning a sizeable income and have multiple assets to your name, but if your CIBIL score is not up to the mark, you can lose the very chance of obtaining a personal loan, home loan, or rather any other type of credit from a bank.

Fortunately, it’s never too late to start caring about your CIBIL score calculation. So, if you want to become more careful with your credit usage, it can help to learn about the top 4 things that affect your CIBIL score:

  1. Payment History

Late payments are often the biggest reason behind a low CIBIL score. These include credit card bills, loan EMIs, etc.

When you don’t pay your credit card bills, etc. on time, it reflects irresponsibility towards money management. Moreover, it shows that you can’t be trusted with credit. Thus, credit rating companies such as CIBIL, Equifax, etc. can deduct a large number of points from your score.

If you want to increase credit score in the fastest way possible, then just start paying your bills on time. Set up reminders on your phone if need be, but make sure that you don’t delay a single payment ever.

  1. High Credit Utilization

Credit utilization plays a big role in CIBIL score calculation, but what’s it exactly?

Credit utilization is the ratio of the amount of credit you spend every month on average to the amount of total credit available to you.

For instance, if you have 2 credit cards, with Rs. 50,000 credit limit on each, then the total credit available becomes Rs. 1 lakh. Now, if your monthly expenditure with the cards is about Rs. 60,000, then the credit utilization ratio becomes:

60,000/100,000 = 0.60 = 60%

If your credit utilization ratio is high, then it can have a negative impact on your score. Although the exact threshold varies from one credit bureau to another, usually it’s around 35% to 40%.

So, by lowering the credit utilization ratio you can increase credit score. The following are two ways you can do that:

  • You can stop using your credit cards frequently. Instead, make payments via mobile wallets, net banking, or even cash.
  • Get a new credit card so that the overall limit is increased and the credit utilization ratio is lowered.
  1. Credit Report Discrepancies

When was the last time you checked your CIBIL report? If there are any mistakes in your personal details, banking data, etc. in your report then it can affect your CIBIL score calculation.

To make sure that your CIBIL report doesn’t damage your credit score, it’s important that you go through an updated copy every now and then. The following are some of the things you should look for: unfamiliar credit card/loan accounts; discrepancies in payment history, personal details, etc.; and false tags such as “settled account”, “defaulting”, etc.

  1. Too Many Loan Requests

When you need a personal loan or a home loan on an urgent basis, then it’s natural to assume that submitting multiple applications to multiple banks can greatly increase your odds of getting an approval from at least one lender. However, nothing can be further from the truth.

When you send out the loan applications at the same time, credit bureaus sense an urgency in this behavior which is not good from the lender’s perspective. Thus, your score could take some damage by this.

In other words, rather than increasing the possibility of you getting a loan, sending multiple loan applications around the same time, can, in fact, lower your odds even further.

If you really want to make sure that you get a loan in the first few attempts, then you must check your CIBIL report first. If it’s all good, you can get a loan without a problem. If it’s not, then you can improve it first, and apply for the loan only after that.

So, these were the most common things that can affect your CIBIL score. Be sure to adjust your credit behavior accordingly so that no only you can prevent your score from any damage, but rather increase it even further.

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Is a ‘Perfect’ Credit Score Even Possible? Or It’s a Myth?

The credit score is globally accepted as a signpost to a person’s credit worth. Banks and financial institutions consider this three digit number as a hallmark of your repayment capability. They gauge the risk factor associated with each loan application considering the credit score of the applicant.

In India CIBIL score is primarily considered as the benchmark of a person’s credit score. Credit Information Bureau of India and TransUnion CIBIL Limited are some of the other names of CIBIL which is the premium credit agency of India. It is country’s first credit bureau which modeled a systematic credit scoring system for banks and financial systems.

The CIBIL score is calculated between 300 to 900 points, wherein 900 is the perfect score while 300 is the lowest score. The more closer an individual or a business is to 900 CIBIL score, the better is their credit worth in the eyes of a lender. According to CIBIL 80 % of people with 750 or above points are granted loans by banks.

It is worthwhile to consider here if a good score a guarantee to loan approval? And for that matter, is it practical to get a perfect credit score such as 900 CIBIL points? Is it even possible to attain the perfection or it is just a myth?

It is not possible to state an absolute calculation on what causes low CIBIL score and why. So, let’s find out what compounds a CIBIL score to reach to point of understanding for this query.

Credit score calculations factor in too many aspects which are not absolute in nature and may vary from person to person. Every individual and business vary in terms of their credit worth and so does the impact of their financial moves.

However we can inscribe 5 common factors that affect credit score calculation globally:

  1. Repayments
    To maintain a good credit score, timely repayment of loans and credit bills is a must criterion. Indeed it is one of the key factors that define the stature of your score. According to CIBIL reports discipline in credit repayment can boost your score by 30 to 35 percent. Thus diligent repayment could be your first step towards the perfect CIBIL score.
  2. Credit utilization ratio
    As important it is to repay on time as is to keep a check on your credit accounts. You should always ensure that you do not overuse the credit limit offered to you. Those who exhaust their limit every month are less likely to have a good score. Lenders assume that you are short of cash and your financial situation might be not be as sound for a perfect score. So, using more than your credit limit has a negative impact on your credit report. Indeed it is recommended to limit your credit use far below 30% of total approved limit.
  3. Query
    Always ensure that you do not make multiple queries in a small period of time. Every time you make a query for loan or a credit card, it is marked on your credit report. Frequent queries
    on your report signify credit hungry nature and thus make you financially less strong.

 

  1. Credit mix
    Every time you borrow or use a credit product, the lender undertakes a risk. They charge interest rate to cover up this risk. When you borrow against a property or some other collateral the risk is substantially reduced and thus you are offered a better rate of interest. With this said, I hope it is clear why you should maintain a right credit mix of secured and unsecured loans. Too many unsecured loans restrict your score.
  2. Length of credit

The length of credit history also affects the score. The older is the good history the better effect it will have on your credit report. Thus those who have older history are rated better than new borrowers. This is also why when you close an old credit card with good history, it affects your score negatively.

 

Knowing these factors you can ensure a good score during all the seasons of your life. If however you target the perfection, you need to frequently check your credit report and monitor every activity that hurts your score.

How lenders estimate credit for mortgage loan requests?

Are you facing a financial crunch? Are you in need of urgent funding? You may approach a bank with a mortgage loan request.

Financial crisis is a very common problem. Your existing property can however take care of your crisis. A mortgage loan helps you to raise funds to meet financial shortage. This is a Secured Loan in which you keep your immovable property (home) as a deposit and take money from the lender. The borrower needs to repay the loan via regular monthly installments within a particular period of time.

But before you do that, you must know how lenders estimate credit for mortgage loan requests.

Mortgage Loan Eligibility   

Both salaried as well as self-Employed individuals can apply for a Mortgage Loan.

To avail a mortgage credit, you need to carry out certain minimum eligibility conditions. The following are some of the factors considered by the lenders while determining your eligibility for a mortgage loan:

  • Minimum age: You should be minimum of 21 years of age at the time of the loan application.
  • Annual income: What income is required to qualify for a mortgage loan depends on the lender.
  • Existing liabilities (if any): Your monthly liabilities are taken into consideration (say living expenses, other EMIs and bills)
  • The valuation of your property (to be mortgaged): The lender generally approves 80% of the registered value of your property as the loan.
  • Number of dependents: If you are responsible for the livelihood or upkeep of some members in the family; they are your dependents (spouse, kids, and parents).
  • Total work experience and stability in current job: How long you have been in the current organization or business, your qualification definitely play a vital role in assessing your loan eligibility. Lenders prefer stability of job and prefer those who are employed for at least two years.
  • Proper financial documents: You should have proper and relevant financial documents (pay slips, ITR, bank statements) to avail the loan.

Basically after gathering information about your income and debts the lender assesses your credit profile. They determine how much you could afford to borrow. Before prequalifying, they adjudge your ability and willingness to repay the loan.

For ability check, the emphasis is put on your income and job stability. However to check willingness to repay they would ask you the purpose of property use. They would check your credit report to closely study your previous history of meeting any such commitments.

Your credit report speaks volumes about your credit repayment history. Looking into your report if the lender finds the report is plagued with derogatory remarks and red flags, it might reject the loan application. The red flags indicate that you didn’t make timely payment of loans in the past or settled with the bank (that is again did not pay in full). In case there is any delinquency, then a valid reason for the same has to be given with proper evidences. All in all, low CIBIL score literally could scupper your mortgage application.

You are usually entitled to get a Loan Against Property (LAP) up to 80% of the registered value depending on your repayment capacity. It is important to keep in mind that every bank has its own set policy to evaluate your property and assess the borrower’s eligibility to repay the loan.

If you have a good monthly in-hand and you are not servicing any other loan, you are eligible to get 60 times your monthly net income as a loan. However if you seek bigger amount you can use home equity to raise the funds.

So whether you are looking for additional funds to meet educational expenses, marriage expenses, medical expenses or even business reasons you need not worry! If you have a property in your name you can use LAP from any of the banks such as HDFC home loan and meet the financial obligations.

It is important to understand here that there are no fixed rules to estimate the eligibility for mortgage. Each lender would consider an application on individual basis.

Being a borrower however you should do a proper homework and know the amount of loan you seek. You should negotiate as much as possible on loan duration and rate of interest. You should ask the lender if there are any prepayment charges. With a home equity at stake you should not leave any stone unturned to ensure the affordability of the loan.

Guide for steps to be taken if wrong loans get reported in CIBIL report

A CIBIL Report is made after collating and collecting a lot of data. This data may pertain to loans, credit cards, payment details, individual’s personal details and employment details. Any credit rating agency be it CIBIL or some other agency just collects the data that is provided to them by various lenders and presents it in the prescribed format and uses the given data to compute the credit score. However sometimes due to error in data provided by some lender, manual fault etc there can be some errors in the CIBIL Report.  A credit check from time to time not only ensures that the person can assess his credit health but also helps one in spotting such errors.

Types of Errors in a CIBIL Report:

As we said there is a lot of information and data provided in a credit report thus there can be various types of errors. While some errors may impact CIBIL score calculation others may not. However it is important to mention that regardless of the impact of the error on the scoring it is imperative that they are rectified at the earliest.

The errors can pertain to wrong reporting of the name, address, date of birth, PAN, Aadhar and other such details. One’s employment details like name of the current or past organization of length of service etc may also be reported wrongly. These errors do not impact the credit score directly.

Then there are errors which can cause trouble as they impact the credit score calculation. These are reporting of a loan that does not belong to you, showing a payment default which did not happen, a larger than actual overdue amount, inaccurate account status (defaulted/settled), wrong loan closure details. These errors can cause your credit score to be low and require immediate attention and correction. Reporting of a loan that does not belong to you lowers your borrowing capacity and any default that may occur on that loan will be reflected in your credit report.  There can be multiple reasons for these errors like the problem may occur at the time of entry or some confusion about an address or PAN details etc.

How to Get the Wrong Loan Removed from the Report?

The first reaction of anyone on seeing a loan that does not belong to them on their CIR would be confusion and panic. However rest assured it is not such a serious issue and can be resolved. The key is to keep checking your report from time to time so that you are aware of the mistakes if any. Problems arise when a person checks their report just before they want to apply for a loan then there might be no time to get the mistake rectified. Worse still they may realize that there is a problem after a loan has been rejected due to a low cibil score. So here are the steps that need to be taken when you spot an error in the report:

  • The first step in obviously to get your CIR and go through the entire report thoroughly so that you know what it contains. Just looking at your CIBIL rating online will not help as one may not be aware of the contents of the report or about the loan listed in it.
  • The next step is to inform CIBIL about the error and register a complaint. This can be done online too. There is dispute resolution option on the CIBIL website, one can fill the complaint form, the 9 digit number from your CIBIL report is mandatory for filling this form.
  • The error may have happened at the level of the credit agency or the lender. Depending on where the error originated the next step would be taken. If the error is at the level of the agency then it can be rectified faster.
  • However if the loan has been erroneously reported by the bank then since CIBIL being just an aggregator will not be able to make any changes on their end and will get in touch with the concerned lender.
  • One can expect a resolution within 30 days of filing the complaint. If one is not satisfied with the resolution then the complainant can approach CIBIL again and if still the matter is not resolved then one can approach the banking ombudsman.

Do follow basic credit health rules and keep checking your credit report from time to time to stay credit healthy. If there is an error, don’t worry there is way to resolve it.

 

5 Ways to Build Your Credit Score from Scratch

It can be a terrifying experience to find out that your loan application was rejected due to the absence of a credit score. However, there is no reason to be alarmed as there are many people who don’t have a credit score for many reasons. If your credit history is blank, then you can build a good one in many simple ways.

The following are 5 good ways to build your credit score from scratch:

  1. Joint Account Holder

The easiest way to build a credit score to become a joint account holder with a person who already has a credit history. However, you must choose your partner carefully.

You would want someone who you trust, and who trusts you too.  This is because your credit history will be based on the kind of credit history they have as well. So, if they have a good CIBIL rating and a good history of timely payments, then your credit score will also increase. Similarly, if they tend to delay EMI payments, etc. then your will have low CIBIL score.

If you want a home loan on an urgent basis but don’t have a good credit score, or have no score at all, then becoming a joint holder is one of the best options for you. This is because the lenders generally don’t consider passing a loan “risky” then there is a joint account holder involved who has a promising credit history.

  1. Becoming Authorized User

It is not always possible to convince someone to become a joint-account holder with you. In that case, they might at least make you an authorized user.

While being an authorized user you don’t share any financial responsibility with the account holder and server only as a signer you can still get credit building advantages. The only problem with this method, however, that you may not see the results, at least for a long time. So, if you want to build credit score fast then becoming a joint account holder is a better option.

  1. Getting a Credit Card

Getting a credit card and using it wisely is another excellent and simple way to build your credit score. Since most banks love to push credit card usage anyway, it won’t be hard for you to get one for yourself. However, the real work begins when you get to spending. Here are a few things to keep in mind when you use your credit card:

  • Credit Utilization: No matter what the limit on your credit card is you must spend it wisely. Ideally, you shouldn’t spend more than 30% of the credit limit. Thus, if the credit limit is Rs. 1 lakh then you should cap your monthly expenses with the credit card to a maximum of Rs. 30,000.
  • Timely Payments: Believe it or not, timely payments are extremely important to build a healthy credit score. If a potential lender performs a credit check and finds a history of delayed payments, then it is easily possible that they will reject your loan application. Similarly, if they see a history of payments done on time then they will feel confidence in your creditworthiness and it will be easier for them to sanction a loan.
  1. Personal Loans

Personal loans are tricky to get especially when you don’t have a credit score. However, you still have a good chance to get a small personal loan. In fact, if you could manage a personal loan along with a credit card then you can get the desired results faster as a mix of different credit forms (loans and credit cards) can give an impetus to the credit score.

  1. Monitoring Your Credit Report

You can easily find your CIBIL rating online. Most of the credit bureaus of India allow the users to download their credit report for a nominal fee. If checking your credit report you find that there are some errors or discrepancies, then you can have them corrected and see an improvement in your score.

Credit building is a long-term process. Unless you already have a credit score it can be difficult to build one, and not to mention the time and effort it demands. That being said, if you can find someone who has some experience in this area then you can succeed in the endeavor easily and faster.

Does credit card limit has any impact on your credit score?

A good CIBIL score ensures that you can have an easy access to financial services in times of need. You can qualify for loans at a low rate of interest as a good CIBIL rating demonstrates that you are financially stable. There are several factors that go into the calculation of a credit score. Though different agencies have different credit scoring algorithms the major influencing factors for all of them include the payment history, credit utilization ratio, length of the credit history, type of accounts and new credit.

Credit utilization ratio has a strong correlation with the credit score. This ratio depends on two factors. Your total outstanding balance and the credit limit. A credit limit is the maximum amount that will be extended to you by the lender. You cannot charge more than that amount within a stipulated period of time. If you do not know your credit limit, you can either sign in to your credit card account to view the limit or call and ask the card company.

The credit utilization ratio is calculated by dividing the total outstanding balance on all revolving accounts with the total credit limit. For example if you have a credit limit of Rs 3,00,000 and your outstanding balance at the end of the month is Rs 2,40,000, your credit utilization ratio is 2,40,000/3,00,000 i.e 0.80. This means that you are using 80% of the available credit. This high ratio is a strong warning sign of credit risk. It indicates that either you are living beyond your means or you are experiencing financial difficulty. Your profile is considered risky as you may have trouble making future payments. Hence a high utilization will bring your credit score down. If your outstanding balance is only Rs 30,000 then the ratio will be 30,000/3,00,00 i.e 0.10. A low utilization ratio is a sign of financial soundness as you are not using too much of available credit. This works in favour of the credit score. Hence the credit card limit directly affects the credit utilization ratio and therefore the credit score of an individual.

Does a low credit limit translate into a low score?

If you have a low credit limit, it does not necessarily mean that you will have a low credit score. If you pay your credit cards in full each month before the due date and do not carry any balances your credit utilization ratio will be zero. In this case the amount of credit limit will not have any effect on the score. It is always a good idea to keep the credit card balance as low as possible in relation to the total credit limit. If you do so you can keep the overall credit picture healthy even if your limit is not too high.

Should you request for a credit limit increase to raise your score?

 

If you are looking to improve credit score, then a higher credit limit will definitely be a good thing. You can either request your current credit card company to raise your limit or apply for a new credit card. Even if the amount owed by you remains the same, a high limit will result in a lower debt utilization. It is suggested to keep the utilization below 30% if you are trying to improve credit score.

 

When a card company extends your credit limit it increases the amount of debt you can incur and gives you greater buying power. Just make sure that a high limit does not tempt you to increase your spending, otherwise the whole purpose of getting the limit increased will be defeated. Take into account your saving goals and exercise financial discipline. Use the limit only when you really need it. If you are not careful you will carry more balances each month and that will translate into paying more interest to the card company.

 

Will closing a credit card account affect my credit score?

It is never a good decision to close old unused credit cards just for the sake of cleaning up your credit profile as far as credit score is concerned. That’s because closing a card will reduce your total credit limit available and increase your credit utilization ratio.

Your credit card limit surely has an effect on the credit score. But it is only one piece of the puzzle. If you are trying to improve credit score it is necessary to look at the bigger picture. Paying down outstanding balances and maintaining a clean track record of on time payments also go a long way in enhancing your score.

 

Know why your loan applications are getting rejected

There has been a whooping increase in the Non-performing assets (bad loans) of the banks in the past couple of years. Hence they have become extra cautious while disbursing loans to the borrowers. They follow a rigorous process of evaluating the applicant. Several factors like the age, income, job stability and CIBIL score are considered to judge the ability of the borrower to repay the loan back. Even the slightest doubt about your creditworthiness may lead to a prompt rejection of the loan application.

 

If your loan application is rejected, it may be a serious blow to your financial plans, especially when you do not have alternatives to finance your immediate requirements of cash. But rather than dwelling on this unfortunate outcome it is better to find out reasons that have led to the denial. Try to pinpoint the cause of rejection and work on that area. A little effort can help improve your financial picture and make you eligible for a loan approval in the future.

 

Here are some most common reasons why your loan application might get rejected.

 

Poor credit history

 

All banks and financial institutions look at your CIBIL Score and CIBIL report to analyse the risk associated with approving your application. A low CIBIL score is a warning sign to the lenders that you may not be worthy of lending money. Most banks have a cut-off score, below which they out rightly reject the applications. Apart from the CIBIL score they also see the remarks on the CIBIL report. Foreclosure, bankruptcy and court judgements show you as a high risk borrower. Even defaults on previous loans, skipped EMI’s, late payments or pending credit card bills are strong reasons of rejection. Make sure you build an impressive credit history before you apply for a loan.

 

Too many borrowings

 

If you have taken too many loans in the past you are seen as a credit hungry individual who is overly dependent on borrowings. Irrespective of whether you were able to honour your debts or not banks maintain a distance from such high risk profiles. They feel that an over leveraged person may not be able to bear the burden of additional EMI payments. Even a high income figure does not give them enough assurance that you will not default in the future.

 

Inadequate income

 

Your income is the key factor that influences a bank’s lending decision. Banks check your income to debt ratio to understand whether you will be able to honour the monthly repayment of loans. Adequately document all the sources of income and attach the tax returns of past couple of years to support as a proof.

 

Unstable job

 

Banks also place a lot of importance on the stability of your job. If you have switched several jobs in the past year, or if your job is temporary, banks may not be assured of a regular stream of income and you may not get an approval. Some banks even require you to be employed in a particular company for at least three years in order to be eligible for a loan. Banks even check the financial health of the company in which you are employed to assess your job security.

 

Previous rejections

If your loan application got rejected in the past it shows up on the CIBIL report. This greatly reduces the chances of future loan approvals. If you are denied loan once it is not wise to keep applying for loans unless you have worked upon the reason of rejection. Each time you do so, banks make an enquiry of your CIBIL score, which causes a further dip in the score. If you know that bad credit history is the reason for rejection, then you should work towards improving your CIBIL score and wait for at least six months before making a fresh application.

Insufficient credit information

Your CIBIL score depends upon how well you have serviced your loan obligations. But if you never took any loans before, you will not have any records in the CIBIL report to prove that you are a dependable borrower. In this case you will not have a CIBIL score. Since banks have no way of judging your repayment behaviour chances of rejecting the application are high. You can start building your credit history by taking secured credit cards. Use them to make monthly purchases and pay of the bills on time. Timely payments on the credit cards will get recorded on the CIBIL report and help build your CIBIL rating.

If your loan application gets rejected the first thing you should do is to check your CIBIL score and get a copy of your CIBIL report. Analyse it and create a plan to improve your credit history. Get your finances back on track so that you are confident when you submit your next loan application. If the reasons for denial are not associated with the CIBIL report then make sure you work on them before submitting another loan application, otherwise a series of rejections will hurt your CIBIL score. All it needs is a little patience and commitment and you can ensure things to move in your favour.

Is a Higher Credit limit good for your CIBIL score?

Thinking about increasing your credit limit? Worried about how it will impact your CIBIL score? In this article we will cover just that! A credit limit is the maximum amount that a lender permits you to borrow on a credit card. Financial institutions take a number of factors into consideration when they set your limit. They will first look at your credit score, which is a numeric summary of your entire credit history. Looking at your CIBIL rating gives them a better idea of your repayment pattern and your ability to repay future credit. Credit card companies will also look at the outstanding credit made available to you through other credit cards. Getting a higher limit on your card does not automatically mean that you should be splurging beyond your means. Rather, you should be wise in handling credit which in turn will benefit you in a number of ways.

A credit score can be positively impacted when more credit is made available. One of the factors that contribute to your CIBIL rating is the credit utilization rate. The ratio of one’s credit card balance to the credit limit is termed as credit utilization. It shows how much credit a person is using. The lower the credit utilization ratio, the better will be your credit score. Likewise your CIBIL rating will be negatively affected when your credit utilization is high. If you decide to avail a higher credit limit and use all of it then your credit utilization will shoot up and tarnish your credit score. However, if you do not touch the newly availed credit then chances are that your CIBIL rating may improve. You could consider asking for a credit limit increase when your income has increased, when you hold a good credit score and when you do not have much debt. It is important to note that financial institutions can revise your limit from time to time according to your CIBIL rating, transactions etc.

One of the other benefits of having an increased credit limit is that you wouldn’t need to hold multiple cards from different credit card companies with lower limits. You would just need to keep track of a single card and use it as per your requirements. Another advantage of having a higher limit is that it can serve as an emergency cushion, provided that you are disciplined in handling finances. You can use it to pay for necessary car repairs, booking last minute tickets etc. The higher your limit, the more you will have at your disposal in case of emergencies. Additionally, higher credit limits make you more appealing to the credit card companies. Financial institutions offer added benefits to their premium cardholders. Keep in mind that credit card companies and other financial institutions want to see you maintain a high CIBIL rating and follow through your financial obligations.

There are downsides to have an increased limit on your card. This happens when you fail to strictly monitor your spending, which then hurts credit score. Often times when availing a higher credit limit, people start to believe that their CIBIL rating has gone up more than it actually has. This increases the chance that they will apply for new credit which again means more credit inquiries will be made on their credit report. Ultimately it leads to a drop in CIBIL rating rather than an increase. You can also run into the risk of increased debt and higher interest payment. Chances are that you may not be able to pay your bill in full when you have an increased credit limit. That again means you would have to pay more in interests to the credit card companies. Another drawback is that you can end up depending too heavily on credit cards.

Yes, a higher limit means that you have more credit at your disposal. Increasing your credit limit can be a good thing if you are financially disciplined. It can serve as your asset. On the other hand, if you are reckless then you can quickly fall into a debt trap. When credit card companies are letting you avail higher limits, make sure that you get every detail from them. Know the plus and minus points of handling a card. Be responsible with the way you treat credit limit increase. It can easily tarnish your credit score which will take time to build up.

 

Hurdles you can face while applying for an education loan

Fulfilling dreams of a higher education is probably one of the biggest achievements for any aspiring student. With the escalating cost of education both in India and overseas, most students have no choice but to avail of a loan if they are to pursue the programme of their choice at the university or college they prefer. Even while a rising number of students are now availing of finance to comfortably fund their education, doubts and ambiguities still run rife with regards to the education loan procedure, the products available, repayment and even to understand what aspect gets funded under an education loan – whether just the tuition or also living expenses and any other related costs.

Let’s take a look at the hurdles that students still continue to face when applying for an education loan with some lenders. One of the first things that are of concern is the limitation on loan amounts with public sector undertaking (PSU) banks. For instance, a master’s degree from reputed university abroad costs upwards of Rs. 50.0 lakhs, and funding it can be a concern when the maximum cap on the loan amount is Rs. 20.0 lakhs.

Another parameter that students need to factor in is the margin money, which is essentially the difference between the required amount and what the bank agrees to sanction. Typically, most banks ask for margin money amounting to 15 percent of the total cost.

Documentation woes also plague students, as the process calls for a laundry list of documents to be submitted. Not only is this tedious but in some cases, it involves running from pillar to post to obtain the required documents. It can also necessitate into multiple visits to the concerned bank in order to submit these documents (often piecemeal) and have the loan application processed only subsequently.

Further, while banks may have an extensive network, not all branches may sell education loans. Hence, it proves to be difficult to avail of a loan if a student is located in a city wherein a branch that processes education loans is not available. On a related note, it is likely that a student is originally from City A, but has relocated to City B to pursue higher studies. If the loan requires collateral which is located in City C, chances are that a PSU bank is likely to decline the loan application, as they require the student as well as the collateral to be in the same city.

How do you overcome these hurdles?

With the advent of non-banking finance companies (NBFCs) in the education loan sector since the past few years, the playing field has opened up and students have a lot more options than they did even a decade ago, when it was primarily PSUs that disbursed education loans. Consequently, the process has become simpler and more streamlined. Not only do students have more options by which they can compare education loans but the competition has meant ramped up customer service levels as well as innovative products. Before you narrow down on a lender to finance your dreams of a higher education, shop around. Evaluate the various lenders in the market and see what it is that they each have to offer by way of products and services. For instance, in addition to the loan, some lenders offer a bundle of value-added services that include calling cards for overseas students, insurance and deals on foreign exchange services.

Check whether the cost of education includes even your travel expenses and accommodation. These days, lenders structure a loan such that these aspects are covered and even expenses such as having to purchase a laptop to use for studies, for example. These are some of the value added services that make availing of an education loan attractive.

When it comes to documentation, the requirements are simplified by some lenders and a one-time exercise is all that it takes in order to submit a loan application. This sometimes gets further simplified if the education institution that you are planning to enrol at has a tie-up with a financer.

When you compare education loans, do keep in mind that the interest rate is one of the factors that you need to evaluate. In addition, facets of the loan such as repayment options, ease of transaction processing and flexibility in terms of online access and repayment of the loan directly from overseas also make a vast difference. Hence even if the rate of interest is marginally higher, you may consider availing of a loan from an NBFC just for the sheer convenience and flexibility they offer.

Education loan and CIBIL rating

As with other loan products, your credit score counts even when applying for an education loan. For a student with no credit against their name, the credit score of the co-borrower is what is taken into account. Hence, to ensure a lender is aware of your creditworthiness you need to maintain a healthy credit score. An education loan is a product that no parent would want to compromise on, given that it is directly related to their child’s future. Hence to be able to get the loan when you really do require one, ensure that your credit score is treated on par with your physical fitness.