Does your credit score impact all loans? Ideally, the answer should be YES, it SHOULD. However, in reality, it does not. Let us explore this concept and see why it is beneficial to the banks as well as the borrowers.
The credit behaviour of the borrower should exhibit the following attributes:
A borrower who diligently adheres to the above requirements can have a high credit score in the range of 750 and above. It makes them eligible to get various benefits such as:
Banks need good borrowers that repay their loans on time. The following benefits accrue to the banks when they increase their share of borrowers with a good credit score:
The banks accept that the intention of the borrower to repay the loan also plays a big part in the improvement of the credit score of the individual. Hence, banks have started incentivising such borrowers by offering them concessions in the rate of interest and other charges. Some banks like Bank of Baroda and IDBI Bank Limited have begun the process of giving preferential pricing on loans to borrowers with a good credit score.
The concept of offering such benefits is prevalent in the USA and other developed countries. It is now finding its feet in developing economies like India. At present, the banks give this benefit to Home Loan borrowers alone. There is scope for including other loans except for the education loans in this concept.
Certain banks have analysed their delinquency data. Statistics show that the delinquency rate was 0.07% of the accounts having a credit score above 760. The figure increases to 0.35% in case of accounts with a credit score below 760.
Bank of Baroda has started offering the risk-based pricing from April 2016. It was after the introduction of the MCLR concept. The move has yielded good results for the banks as they have succeeded in attracting more customers with good credit scores into their fold.
As a result, some banks are offering risk-based pricing in all retail loans.
IDBI bank is also actively offering the risk-based pricing to its home loan customers. They are also looking to expand this concept to include the Personal Loans.
These two banks have started the process of providing risk-based pricing. It is a matter of time before other banks will follow suit. Customers should understand that it benefits them more than the banks. A quick example can explain what a reduction of 0.5% in a Home Loan can do over the entire tenure of the loan.
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