Wednesday, 30 November 2016

Does credit score actually impact the loan approval?

If you are planning to take a loan to meet your immediate cash requirements, the last thing you would want is to face a rejection. Banks consider various factors relating to your past financial situation to determine whether you will be able to pay back the loan that you are requesting. You must have heard that most banks these days use the credit score and credit report to evaluate your loan application. A person who has a very good score of above 750 most likely gets approved. A person with a bad credit score may have to face a rejection. But is credit score the only factor that is responsible for a loan application approval? Does it mean that a person with a less than perfect score cannot secure loans? Let’s explore.
A credit score is a reflection of how a person has handled his past credit facilities. If you have a long history of timely payments of loan instalments and credit card bills in the past you get a high score. This assures the bank that you are a responsible borrower. While a number of missed or delayed payments or over dependence on debts brings down your score and signals the bank that you are a risky borrower. Banks looks for safety of the money before they extend loan to a customer. Hence it is obvious that they will give some weightage to this number. They will even offer better interest rates and terms to borrowers with a high credit score.
If you have a high score and an attractive credit report banks will definitely have a positive view about your profile but there is no guarantee that your loan will be sanctioned. Similarly a low score does not necessarily mean rejection.  There are other parameters too that are considered to analyse your repayment capacity before a final decision is taken.
Income- Being a reliable payer in the past is one thing and affording a new loan is another. The credit score only tells whether you are a responsible payer. But it is actually your debt to income ratio that determines whether you can afford a new loan. Banks compare your monthly income (income from salary, bonuses, dividends, interests) with the total monthly household expenses. If you have sufficient savings to cover the monthly loan payments banks will look past your CIBIL score and most likely approve the loan. As a rule of thumb if your debt to income ratio is 30% or lower then you are most likely to qualify for a loan from a reputed lender. If you have a lot of liquid assets like savings, stocks or government bonds that can be immediately converted into cash to service the loans in case you experience a financial setback, then you will be viewed as less risky by the bank.
Down Payment- If your credit score is on the borderline, then banks may approve your home loan application if you make a sizeable down payment. A bigger sum of down payment reduces the loan amount and lessens the risk to the bank.
Secured loan- If your score is low, bank may ask you to provide collateral or a guarantor. If you do so, they may be willing to give you loan, though at a high rate of interest and for a shorter tenure. In case you apply for a gold loan, banks will most likely not bother to check your score, since the gold itself provides enough security against any default.
Subprime loans or loans for bad credit score- If your credit score is below 600 you may not be approved by the market leading lenders. They have strict guidelines and cut offs below which they out rightly reject applications. However there are lenders who consider parameters other than the CIBIL score and offer loans for bad credit. They let you explain the reason for why your credit history went bad. If they are convinced with your rationale you can secure these loans. The only downside is that these loans often come with a very high rate of interest and a lot of hidden charges.
When you are out in the market to secure a loan your full financial profile is evaluated to assess the risk associated with lending you money. A high credit score definitely removes a lot of risk from the equation but it is just one hurdle crossed. The other important factors like your income, job stability, liquid assets, savings, current debts, down payment, collateral equally influence the bank’s final decision.


1 comment:

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