Things to do while preparing for a Loan Application: Eligibility Check
Applying for a loan can be a very unnerving and anxious process. You fill in lengthy forms, collect and submit various documents to multiple banks and then find yourself waiting with bated breath for loan approval while your plans for that dream home, your first car or your child’s education are kept waiting.
1. Your CIBIL Score
The first thing you should do is get your CIBIL Score and Report from a Credit Bureau. Usually, a CIBIL Score of 750 or more puts you in contention for a loan approval but does not guarantee it. Of course, if your score is below 750, all is not lost. There are financial institutions who will lend to individuals with a low score.
DETERMINING YOUR CREDIT ELIGIBILITY
2. Your Credit Eligibility
Your credit eligibility is the second criteria reviewed by a lender. Your credit eligibility is determined using your CIBIL Score and Report and your bank statements as follows:
- Review for payment irregularities:As a first step, lenders will review your CIBIL Report for abnormalities in your payment patterns. Missed payments, overdue amounts and settled accounts in the recent past indicate financial duress and are likely to result in a loan rejection. If you see any of these conditions on your CIBIL Report, it would be better to pay all your dues consistently for 12 months before applying for a loan.
- Calculation of Debt Burden Ratio: The next criterion that the lender considers is whether you will be able to meet any additional payments given your current financial condition. In the diagram above, the individual has an in-hand net income of INR 1,00,000, while his EMIs total INR 25,000. This places his Debt Burden at 0.25. Typically, a lender will reject your application if your Debt Burden Ratio exceeds 0.50. The assumption is that you will need at least half your salary to sustain normal expenses (utilities, entertainment, etc.). The difference between these two figures, i.e., 0.25, is his Borrowing Capacity, which amounts to INR 25,000. Assuming he takes a loan for 15 years at interest rate of 10%, this indicates a Credit Eligibility of INR 25,00,000.
- Outstanding Credit Card Payments: If you have 3-4 Credit Cards and have utilized a very high percentage of your credit limit, this may negatively affect your loan application. Interestingly, unused Credit Cards may be viewed positively.
As you can see, you have all the tools required to figure out your credit eligibility. So, before you apply for a loan, ensure that you make these simple calculations to not only save yourself the embarrassment of being rejected but also to put yourself in a better position to bargain for a better deal.