What Is Credit Review And How Does It Work?

To reduce the possibility of losing money on a bad debt, lenders carefully examine each application to ensure all the documents and claims by the borrowers are in place and true.

Prior to approving the loan application, the lender, be it a bank or a non-banking finance company, does a thorough examination of the applicant’s financial situation and their ability to repay the loan. This process is called a credit review.

Lenders primarily conduct a credit review for large-ticket loans such as home loans, car loans, and business loans.

To demonstrate one’s financial stability during the application process, one needs to provide many personal and financial documents, including most recent tax returns, proof of income, account and credit card transactions, records of any new debt, and any foreclosure evidence.

This data is examined by the lender and is used to determine whether or not they should extend the loan to the applicant.

The lender also conducts a credit review on a regular basis to update its analysis, to ensure that the loan is safe and the borrower is still in a position to repay it.

Any creditor including the bank, a financial service institution, a credit bureau, or a settlement company can conduct credit reviews.

What Aspects Are Taken Into Account When Reviewing Credit?

Credit Report

A CIBIL credit information report keeps a record of one’s credit history including monthly credit card payments and loan-related EMI payments. It contains different sections with data such as personal information, accounts held by the potential borrower, and inquiries made by the borrower seeking different types of credit.

Employment

Whether one is a salaried employee or a business owner, the borrower’s employment status affects credit decisions.

Capital

For a business loan, the concept of capital holds great importance. The capital amount represents both the cash balance and the physical asset. The lender also assesses how liquid the business is.

Debt-To-Income Ratio

This ratio shows how much of the borrower’s monthly income goes towards paying off debt. The ratio is derived by dividing one’s monthly debt payments by the monthly gross income.

Collateral

In the case of a secured loan, one offers up an asset something as collateral such as land, gold, or property. Secured loans and their respective collaterals are also a part of the credit review. In case of failure of repayment of the loan, the lender can seize and take over the collateral.

Types Of Credit Review

During The Application Process:

When one applies for a loan, the lender conducts a credit review to evaluate the loan proposal.

Periodic Review:

The lender may conduct periodic credit reviews during the repayment term to ensure the borrower is still in a position to repay the loan . In case of any issues in the review in the middle of the term, the borrower and lender may work out new terms for the loan.

Self-Review:

This is conducted by the applicant itself, wherein they approach the credit bureau for their own credit review.

Does Credit Review Affect Credit Score?

Lenders access the applicant’s credit report from a credit bureau while conducting a credit review, in a process known as a credit inquiry.

When the lender seeks access to a borrower’s report it is known as a hard inquiry. However, a self-inquiry does not count as a hard inquiry. But, it is advisable not to make too many self-inquiries.

Although a hard query does not lower one’s credit score, a string of hard inquiries may have an adverse impact.

Difference Between A Credit Review And A Credit Report?

Credit report forms a part of the credit review, as the report on its own does not have enough information about the borrower’s level of creditworthiness.

A credit review examines the applicant’s current financial condition, as opposed to a credit report, which is a record of one’s loan repayment and credit management history.

Also, the credit review includes other details such as the borrower’s income, debt-to-income ratio, capital, stability of employment and income, collateral, etc.

Conclusion

Lenders like IIFL Finance place a lot of importance on their consumers' financial records, current financial situation, and credit histories, and therefore, for larger loans, they conduct credit reviews.

A credit review help lenders to measure the creditworthiness of a potential borrower and determine if he has the ability to repay the loan.

As long as a client has a good credit review including a strong credit score history and no history of missed payments or loan defaults, a reputed lender can provide the most affordable interest rates to them.

Leading NBFCs like IIFL Finance offer easy loan approvals with a simple procedure. Additionally, IIFL offers affordable interest rates and various repayment plans that make it simpler for borrowers to pay off their debts.