How banks decide to give loans?
While it is quite easy to get a loan nowadays compared to yesteryears, thanks to the ever-growing competition among banks to sell loans, it is not always a bed-of-roses for the customers. Banks do check on the loan eligibility criteria of a customer diligently before sanctioning a loan and it can be quite disappointing for you especially when you were counting on it.
So let’s try and see today the ways banks ensure your credit-worthiness and how you can improve your chance to secure a loan to finance your dreams.
- CIBIL Score: Credit Information Bureau of India Ltd. (CIBIL) maintains a database of credit history like loan repayment, credit card payments, etc. of various customers across different banks. Banks do check your credit history and score before sanctioning loans.
- Fixed Obligations to Income Ratio (FOIR): The banks will first deduct about 50% from your monthly income for your other expenses and then check whether your “fixed obligations” like loans are met by the remaining 50% of the income.
- Financial Documents: If you are engaged in business, it is vital that you have a good business going for the last 3 years and are able to meet all your expenses from your business income. Banks would analyze the Income Tax Returns, Audit Reports, Balance Sheets, etc. to ensure that your business is going to survive for the coming years. On the other hand, your salary slips will establish your exact take-home pay and whether you have a steady income. If you have a steady rental income, it is also taken into consideration for loan eligibility criteria.
- Loan To Value Ratio (LTV): For home and auto – loans, banks would ensure that the Loan To Value (LTV) is low. LTV is the amount of loan sanctioned by the bank on the total value of the mortgaged asset expressed in percentage. So, if the asset is worth say Rs.1000000/- and the amount sanctioned is Rs.800000/-, LTV is 80%. A low LTV will ensure that the bank would be able to sell the asset if the borrower defaults. Hence if you ask for a lower LTV, you have a good chance to secure the loan, as the risk is low for the bank.
These are the most common ways a bank would decide to give a loan to a client. As you can understand from the above points, banks ensure that a borrower has the ability to repay the loan and also that he/she has the intention too. Once you can establish your ability and intention to repay the loan, banks will go ahead and extend a warm welcome aboard.
Now that you know how banks decide on loans, check whether you are eligible or not yourself beforehand.
I’ll specifically write how you can increase your chance to secure a loan next time. In the meantime, do keep your comments flowing as usual.
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