The ultimate goal of every lender, whether it’s a traditional bank or an NBFC, is to maximize profits and minimize costs. Since loans make for a good part of their portfolio, they take a variety of measures to check associated risks.
How do Banks Assess Loan Applications?
The banks consider several factors when they review loan applications. These are:
Credit History
Credit history is your history with previous loans, credit cards, and other forms of debt. Some of the things that hold a lot of value in terms of risk assessment, is whether you have ever defaulted on a loan in the past, or were late with payments, etc. However, if you are applying for a business loan, then the bank may also check the credit history of the business profile.
Collateral
Collateral helps a bank balance the risk-reward equation, especially when the loan amount is high. This is because when they attach a property, stocks, gold, etc. to a loan, then they have the option to claim the rights to these if you are unable to or refuse to repay the loan in the future. They can then sell these off to get their money back.
Debt-to-Income Ratio
Debt-to-income ratio is the percentage of your net monthly income that’s spent on monthly debt payments viz. home loan, personal loan, credit cards, etc. Naturally, if the ratio is high, then it means that you will have a hard time accommodating another loan and it may become a reason for the lender to turn down your loan request.
Nature of Application
When you apply for a loan individually, then the risk is higher compared to a joint application. So, if you are applying for a loan with a co-applicant, such as your spouse, then you can expect the bank to give approval rather easily. In fact, it’s not uncommon for married couples to apply for home loans together.
Role of Credit Score
While the factors above certainly play a big role in the loan process, the most important thing that matters to a lender is your credit score or CIBIL score. But why is that?
A credit score is basically a numerical representation of your creditworthiness. So, if a bank has to approve a loan, then they can check your credit score to predict how likely you are to default on the loan. This simplifies things and makes loan processing faster and easier.
What’s the CIBIL Score?
CIBIL stands for Credit Information Bureau (India) Limited. It’s one of the biggest credit rating agencies in India which maintains and updates the credit details of millions of users across the country.
CIBIL follows a scoring range of 300-900 which means that the lowest and highest score that you can achieve is 300 and 900 respectively. However, no bank expects a borrower to have a perfect score of 900. Most of them just want you to have a score from 750-900.
Why do Banks Easily Approve Loans for Credit Scores Ranging from 750 to 900?
As mentioned above, banks check various factors when evaluating loan applications. However, the CIBIL score summarizes all these factors and make it easier to make a calculated decision. So, if someone has a good score i.e. above 750, then they are likely to be a good candidate for a loan.
The following are some of the reasons why banks easily approve loans for high credit scores:
- Applicants with a high score can be expected to clear their loans on time
- High-score applicants are also likely to pay their EMIs on time without fail
- Chances of defaulting are quite low among applicants who have a good credit score