Buying a home is perhaps one of the most important decisions one can make. It’s a huge investment and requires extensive research and planning. The budget plays an important role in decision making and therefore people usually opt for home loans to finance the purchase. Due to the pandemic, interest rates on loans are at an all time high. This makes the current period a good time to take the plunge: apply for a home loan.
However, the loan application process is not easy. Before offering a loan, banks make sure that the applicant will be able to repay it on time. In other words, they verify the eligibility of the applicant. But what does it take to be able to access a loan? Let’s find out.
Main eligibility criteria for a loan application
Loans provide financial leverage that extends beyond income. Whether it is a home loan, personal loan, or any other type of loan, credit is granted by the lender based on certain key parameters. In India, a borrower’s eligibility is determined by their CIBIL score.
Credit Information Bureau India Limited (CIBIL) is a credit information company that is part of TransUnion and has been operating in India since August 2000. CIBIL collects and maintains personal and business credit files. The CIBIL score is a three-digit number ranging from 300 to 900 and is calculated based on a person’s credit or loan history. The higher the CIBIL score, the more convinced the lender is of a borrower’s repayment capacity.
How does your CIBIL score correspond to loan eligibility?
As the saying goes, the more the merrier. This also applies to the CIBIL score. A high score means that your application will be processed faster, the interest rates are easily negotiable, and you can borrow a large amount of money. A low CIBIL score indicates an unstable financial situation and reduced repayment capacity. Missed payments, multiple loans, frequent credit applications, high credit utilization rate, improper management of credit types, and no credit history can lead to a low CIBIL score.
If you are new to credit, banks will determine your creditworthiness based on factors other than your credit rating or history. These include your current repayment capacity which will depend on your income and the stability of your job. In such cases, getting and maintaining a credit account to build a good CIBIL score can help speed up the loan process.
How Can You Improve Your Credit Score?
1. One-time refund: Maintaining a consistent and timely repayment schedule is important to building your credit score. This may help lenders to trust you more and to consider granting you larger loans in the future. Plus, paying off the debt lowers the interest burden on you.
2. Clear past invoices: Banks look at the history of borrowers to determine their creditworthiness. A record of on-time and consistent payments over a long period is crucial to building a good credit history which is reflected in a higher CIBIL score.
3. Debt consolidation: You can look to consolidate all your existing debts into one to reduce the burden of repayment. Credit consolidation will help you build your credit history by reducing the amount of interest you pay on various loans and bills, thereby improving your credit score.
4. Diversify credit: If you don’t have a credit history, your CIBIL score will be low. In such a case, be sure to borrow different types of credit. Borrowing both secured and unsecured loans of different lengths and durations will help you build your score.
5. Review of credit report: Sometimes errors can creep in when CIBIL updates your records. This can impact your credit score without you being responsible for it. Therefore, it is advisable to check your CIBIL report from time to time. This will allow you to identify errors and correct them by submitting a CIBIL dispute resolution form online. It will also give you an overview of your CIBIL score, helping you understand how lenders view your financial history over time and how you can improve it in the future.
6. Avoid taking on too much debt at once: Avoid taking out a large loan or taking out multiple loans if you are under-equipped to repay the borrowed amount on time. Before applying for a loan, research the market and find out how much you will need for your housing project. Remember that you will also have other expenses such as renovating and furnishing your new home.
7. Lower credit utilization rate: A higher rate of credit utilization is generally associated with borrowers who are heavily indebted. In such cases, it becomes difficult to maintain good financial discipline and repay the loan on time; therefore, the lender will not be able to trust the borrower. Using less than 30 percent of the total available limit is a good rule of thumb to improve your credit score.
In conclusion, it is important to make sure that you are eligible for a loan before applying for it. A CIBIL score is not the only criterion to determine your eligibility but it is the most practical because it will give a quick indication of your creditworthiness over time.
The author, Amit Agarwal, is co-founder and CEO of NoBroker.com. Opinions expressed are personal
(Edited by : Anshul)
First publication: STI