Thursday, 7 July 2016

Relationship between CIBIL scores and loans

Loans are heavily dependent on CIBIL score. In fact, CIBIL score is the financial baggage, which always tags along with loans.

CIBIL score is a crucial and vital element for loans. It is why one faces rejection of loan for low CIBIL score. Most people are not even aware of their CIBIL score or something called as the “CIBIL score” until they face of rejection of loans for bad credit score. Loans and credit score is interlinked. One’s chances of getting a loan are directly proportional to his or her credit score. The lower the score, more probability of rejection of loan for low CIBIL score. The higher the score, the lesser the probabilities of rejection of loans for bad credit score.

The actual procedure:

Loan borrowing sounds simple. The procedure is indeed a cakewalk if you have done all the things right. An individual fills a loan application form for a desired bank. He hands over the form to the bank. The person’s bank inquires for the person’s credit report and score, and thus the tough part begins. If the person is eligible to receive a loan and he has a good credit score; the bank approves his loan application. On the other hand, if a person is eligible to get a loan but he has a bad credit score, then the bank will reject that person’s loan for low CIBIL score.

The lender’s point of view:

It is easy and illogical to blame lenders for rejecting loans for bad credit score. We all are aware but tend to overlook the fact that lenders are those wishful thinkers who really want people to take their loans. The reason why lenders sell loans to people is that they make money from the rate of interest one incurs. However, while evaluating loan applications, a lender likes to make sure that he is lending money to a responsible individual, someone who will be able to repay the same along with the defined interest. Nobody likes complicated things, not even lenders. The process is simple: Take the loan today and return it along with the interest tomorrow. Nobody wants to go running behind anyone or knocking people’s doors asking for money.

When banks approve people’s loan applications, they necessarily look for five things in the person’s credit report.

1.     Their Company Profile: Banks have a pre- approved list as to who is eligible for the loan and the credit card depending on their company profile. In case your profile in their list of the chosen profiles; your application will be approved.

2.     The Account Status Section – The account status section is of prime importance. It indicates any suits filed or any written off cases. This might affect your chances and this might be another reason for rejection apart from rejection of loans for bad credit score.

3.     Repayment Trend: One’s repayment trend is captured in their credit report. In case one has defaulted in his past, then that record will be evident in the 'Days Past Due' [DPD] field. This might be another reason for rejection apart from rejection of loan for bad credit score.

4.     Credit Score: It is noted and known that 79 percent loans are sanctioned to people with a CIBIL score greater than 750. It is crucial that one maintains a good credit score. Otherwise, they can face refusal of loan for low CIBIL score. One can always follow certain techniques and methods to improve their score. They can also take help from credit repair companies like Credit Sudhaar, who offer a plethora of services like credit health check up, score improvement module and free loan assistance and helps in preventing refusal of loan for low CIBIL score.

5.     EMI to Income ratio: This is simply the ratio of your EMI to your income.

 If (EMI/ Income ratio) < 50 percent, you have good chances of getting your loan approved. Otherwise, more chances of getting your loan rejected.

To make the logic simpler, let us understand the same with two examples.

1.     Imagine you have an income of Rs 50000. As per rule of thumb EMI to income ratio, your total borrowing capacity is only 50 percent of your salary. Lenders assume that you will require 50 percent of your salary to pay your living expenses. So, your total borrowing capacity in this case is 25000. Now, banks check for incremental EMI, which is borrowing capacity minus the EMI. Suppose your EMI amount is 10000. Thus, incremental EMI is 25000 – 10000 = 15000. Based on this, a total loan of 15,00,000 may be allocated to the person at the rate of 10 percent for 20 years. This application is likely to get accepted.

2.     Similarly, imagine a person with a salary of Rs 100000. As per rule of thumb EMI to income ratio, his total borrowing capacity is 50000. Now suppose the EMI amount is 50000. So the incremental EMI will be borrowing capacity minus the EMI = 50000 – 50000 = 0. Based on this figure, no loan can be sanctioned to the person. This kind of an application will most probably get rejected for a reason not equivalent to rejection of loan for low CIBIL score.

Yes, loans are heavily dependent on CIBIL score. And hence, it is significant that we maintain a healthy credit score. After all, when we apply for loan, we expect to receive “a loan” instead of being left “a lone” with nothing in hand.

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