5 Critical Factors That Impact Your Loan Approval
Your credit score is the single most critical factor that impacts your loan approval. Let us see what a credit score conveys and how it can affect your Personal Loan approval.
What is a credit score?
A credit score is a 3 digit number (between 300 and 900) that lenders use to determine the loan eligibility of any individual.
Who generates this all-important credit score?
There are various credit agencies like TransUnion CIBIL, Experian India, and so on that generate these credit scores from the data collected from all the bank accounts in India. Banks in India usually approach CIBIL to obtain the credit history. A credit score in the range of 700 and above is considered a good score thereby qualifying borrowers to Apply for Personal Loans and Credit Cards.
What are the significant factors that determine your credit score?
1. Outstanding Balance
The outstanding loan balance is a significant factor influencing your credit score. Lenders use this information to determine your credit utilization ratio (CUR). It is the ratio of the outstanding balances to the credit limits. In case of Home Loans and the term loans (especially those availed recently), the ratio will be very high. Lenders are more interested in the CUR of your Credit Cards accounts. A high proportion indicates that you are not good at managing your credit. At the same time, a NIL ratio is an indication that you do not require much credit. Therefore, it is better to maintain this ratio at around 20% to 30%.
2. Repayment History
Your repayment history conveys your inclination to repay your loans on time. The design of the credit report is such that it shows the number of days you have delayed repaying a particular loan instalment or Credit Card debt. Lenders are not worried about a day or two of delays. It can happen to the best of people. If the delay is more than a month, it sends the warning signals that you are irregular in your payments. It affects your credit score a great deal.
3. Types of Credit (Secured vs. Unsecured)
There are various kinds of loans such as Home Loans, mortgage loans, Business Loans, Personal Loans, Credit Cards, and so on. Lenders look for a healthy mix of accounts in both the secured and unsecured categories. They focus more on how you repay your unsecured loans like Credit Cards and Personal Loans rather than the guaranteed liabilities like your Home Loans and mortgage loans.
4. Your Loan History
The report indicates whether you are new to credit or have a sufficiently long history. New borrowers with credit history less than six months get a rating of -1. Lenders are not in a position to judge your repayment history because of your poor credit history. Hence, the only way out is to build up a credit history of at least six months. The best way to do so is to have secured Credit Cards. Banks issue such credit cards against a lien on the fixed deposits. These cards are similar to the standard Credit Cards in all ways. The banks allow you to make monthly payments. They resort to exercising the right of lien only in case of default.
5. New Recent Credit
Banks are also wary of your credit inquiries. The report shows a list of queries made by banks and financial institutions on your account. The higher the number of recent investigations, the more desperate you are for credit. It is okay if the queries are for home loans. Banks understand that a person might make various applications for Home Loans with different lenders. The Credit Card and Personal Loan inquiries matter for the banks. If you have more queries in this area, the banks term you as a risky borrower. It affects your credit score and thereby impacts your loan approval.
Managing your credit score is critical. You should look into these aspects as it can improve your credit score.
- Refrain from making unnecessary applications for Credit Cards and Personal Loans
- Repay all your loans on time and before the due dates
- Utilise your Credit Cards wisely by maintaining the CUR at around 25%.
- Maintain a right balance between the unsecured and secured loans
Managing your credit score has a positive impact on your loan approvals.
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