Loans are no longer considered a last resort to buy a sought-after smartphone or a dream house. Over the last decade or so, people have become less hesitant in applying for a loan, whether it’s personal, vehicle, education, business, or home – especially when they don’t have a lump sum at their disposal. Besides, Home and Education Loans provide tax advantages that reduce tax liability and increase the cash in hand from salary income.
It also helps that banks are making it easier for customers and prospective borrowers to get loans with minimal paperwork, quick eligibility checks, and competitive interest rates. They have opened an online channel to apply and submit documents for the approval process. If you still find the loan application and review process intimidating, here’s a list of seven factors that would determine the approval of your submission.
Your credit history is indicative of your future repayment behaviour, based on your pattern in settling past loans. It helps the bank to know if you will be punctual and regular with your payments. Any default or delay in the past is investigated – the longer the delay, the lower your score is likely to be.
Generally, a credit score between 700 and 800 is positive. That means you are likely to be favoured as a safe applicant with a clean history devoid of any repayment defaults. On the other hand, credit score of less than 300 will increase the likelihood of your application being rejected. Specialised bureaus such as CIBIL are a source of credit scores that banks seek information from to assess your creditworthiness.
Banks weigh your employment history and current engagement to ensure that your source of income is reliable.
As already mentioned, your income represents your repayment capacity. Banks assess your income capacity in the backdrop of existing debt obligations, dependents, source, and duration. In this context, one of the many things the bank checks is sufficient surplus after EMI payments. If this is found wanting, the bank infers that you’re spread far too thin and likely to default. However, if the ratio is five times and above, the bank will consider you financially healthy.
If you choose a shorter repayment period, you have a better chance of getting the loan approved. Several banks favour applications for a repayment period of up to five years. As the repayment period increases in five-year slabs – 10, 15, 20, and 25 years – the score reduces. So, keeping it short is the mantra in seeking that approval from a bank for a loan.
The collateral you provide to the bank while applying could help you secure the loan easier and sooner. As the loan amount is a percentage of the assessed value of the collateral, a high-value asset could mean more credit sanctioned for your use. The asset could be immovable (land or house) or movable (vehicle, inventory, equipment, investments, insurance policies, gold jewellery, art, and other such valuables). While Personal Loans (including credit card outstanding balance) are unsecured loans, approval for loan to purchase a car or a home, run a business, or study will not come through unless there is adequate collateral.