Thursday, 30 March 2017

Do not shop around for loan. It may lead to rejection

If you were to apply for a college and school admission the strategy one would follow is to apply to maximum places and then wait for a favorable response. This would seem to hedge your risks. The same can be done when applying for a loan, right? That way you would be assured of getting a loan at favorable terms; no wrong. Applying for loans randomly is not a good idea; while it makes sense to compare interest rates for a loan and also the terms and conditions it does not make sense to apply at too many places as it could impact your chances of getting a loan approved.
Shopping for Loan: Why to avoid?

Before we understand why shopping for loans is bad it is important to understand about hard enquiries. Whenever one applies for a loan, the first step is the prospective lender seeking a Credit Information Report of the applicant from one of the credit bureaus. This generates a hard enquiry and is one of the five factors that go into the credit score calculation. Thus as many applications you make for a loan there will be as many hard enquiries corresponding to it as each bank will access your credit score. All these enquiries into your credit score are reported in the CIR and impact the credit score negatively. Thus if you are working on trying to increase CIBIL score a good way would be to stay away from making any loan enquiries.
So coming back to shopping around for a loan; when you make too many credit enquiries then it reflects that either you are credit hungry or are not qualified to get a loan or both! While at some point a hard enquiry may be unavoidable and it is mandatory before a loan is sanctioned it is best to avoid too many of them. Making too many credit enquiries can reflect that the applicant is credit hungry and is trying to access credit from multiple lenders at the same time or within a short span of time which obviously makes such a person a high risk candidate and lenders would obviously try to avoid such an applicant. Then another conclusion that can be drawn from a CIR which has too many credit enquiries is that the applicant is applying for loans with various prospective lenders but his/her application is being rejected thus leading to fresh loan applications. This will also make the prospective lender vary and could reduce your chances of getting a loan sanctioned. One or two hard enquiries a year will not have any adverse impact on your credit score.
Shopping for Loan: The Right Way:

Loans are usually a burden whether big or small depends on the loan quantum, interest rates and duration. In some cases especially like home loans even a small difference in the interest rate or the terms and conditions could make a huge impact financially. Quite obviously one would like to compare home loans, the terms and conditions, interest rates and other things too before applying so that they can get the best deals. But how to do this without reducing your chances of getting a loan approved.

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