Look before you apply for a loan!
We have explained below a few important concepts that you must be aware of while applying for a loan.
There are times in life when you need to consider the option of availing a loan. However, before going the loan route you must first decide the purpose of the loan and accordingly arrive at the amount and tenure of the loan. These days we come across a lot of advertisements which promise quick, collateral-free loans, low interest rates etc. Nevertheless, before you apply for a loan, you should keep certain points in mind so that your loan sanction process is seamless; let us understand these in detail.
Strengthen your credit score!
The first step before applying for a loan is to check your credit score, which is a number that denotes a person’s creditworthiness based on his credit history.
Credit score aids the lender to evaluate the probability that an individual will be able to repay his debt.The factors that are considered while calculating the credit score are payment history, total amount of debt owed, type and length of debt among others.
The strength of your credit score depends upon your repayment behaviour and track record, and any delay or default in repayment can impact your credit score negatively. Higher the credit score, the better are the chances of your loan getting approved. It is required that you start working towards strengthening your credit score long before you apply for a loan.
Mind the interest rates!
The second step before applying for a loan is to check the prevailing interest rates offered by various lenders. Check the rates and terms of various loans to ensure you get the best option for your requirement.
Don’t be surprised if your friend pays lesser interest rate on the same loan amount as yours. The rate of interest on loans depends on a variety of factors like inflation, government policies, lender’s policies in the broader sense and the amount of loan, tenure, gender, risk group, etc. in an individual capacity.
At IIFL Finance, we have adopted risk based pricing, which is arrived upon by taking into account parameters like the customer’s financials, credit profile and prevailing market rates at the time of sanctioning. Accordingly, the rate of interest may change from time to time as may be stated by IIFL Finance.
Interest rate may be fixed i.e. interest rate on your loan does not change during the tenor of the loan, or floating i.e. the rate of interest varies based on benchmark rate.
Correct information is the key!
The third step which will take you closer to getting the desired loan is to provide your correct information to the lender.
Financial institutions require a few documents such as bank statements, income proof and address proof, before they start evaluating your loan application. The documents are required for evaluating your financial standing, loan obligations or to detect any fraudulent activity.
While income and obligation details are essential to compute the loan eligibility, address verification is conducted to check if there have been any fraudulent activities conducted using the credentials and also to ensure that your information has been recorded accurately. Further, latest bank statements are needed to check your existing financial obligations, whereas the credits in your bank account may be considered to arrive at the loan eligibility. Hence, it is in your benefit to find out what proofs of income and assets will be required to apply for a loan.
Be KYC ready!
The fourth step that you need to take before applying for a loan is to be KYC ready.
As per Reserve Bank of India, it is mandatory to complete certain checks before lending to any borrower. The standard terminology used for these checks is called KYC i.e. Know Your Customer, which is used for customer identification process. This process helps to ensure that the services offered by the financial institution are not misused.
There are six commonly accepted documents notified by the Reserve Bank of India as Officially Valid Documents (OVD) for the purpose of producing proof of identity and address viz. Passport, Driving Licence, Voter Identity Card, , proof of possession of Aadhaar number issued by UIDAI, NREGA Job Card and Letter issued by National Population Register containing details of name and address . Any one of these documents can be submitted as proof of identity and proof of address. In case the OVD does not have the updated address, additional documents as listed by RBI shall be submitted as deemed OVD. Also, PAN is a mandatory document apart from list of OVDs mentioned above.
KYC documents need to be updated basis risk assessment done by the financial institutions. Hence, it is mandatory to comply with the financial Institutions’ requirement for submission of KYC documents at regular intervals.
Once you have decided on the type, amount and tenure of the loan which will aid in fulfilling your financial obligations, make sure you have a plan in place to repay the loan on time too. This is called financial prudence! Financial prudence is also aboutt avoiding common mistakes people make. So, it is important to plan well in advance and invest in areas where you can expect high returns.