Things you should be aware of before applying for a loan

Oct 23, 2016 9:15 IST 1869 views

Financial literacy is gaining importance in today's world and the knowledge of money can help you take informed and effective decisions. Following are the most common parameters/details used by financial institutions to sanction credit are:

  • Occupation Details (Business/ Service)
  • Income
  • Collateral/ Security
  • Credit Score/ Record
  • Bank Statements
  • KYC

Explained below are a few concepts that you must be aware of while applying for a loan:

Credit Score

You must have at times wondered, how a financial institution decides to accept or reject a loan application. As a standard check, a financial institution has to assess an applicant’s credit worthiness and find out if he/she does/does not have a troubled repayment history. Credit scores computed by reputed Credit Bureaus take into account, customer’s behaviour/history across various standard sources and serve as one of the important decision making factors for financial institutions.

What is a Credit Bureau Score?

The Credit Bureau assigns score based on your existing credit information and repayment track record collected from various banks/ financial institutions. This helps a bank/financial institution predict your future behaviour of loan repayment. With sustained and healthy repayment the score is likely to improve; however, if there are delays/default in repayment of loan or a lot of credit enquiries are done, the score gets decreased.

Why is it important?

The score plays a critical role in the loan approval process. The credit score works as a first impression for the lender, the higher the score, the better are your chances of the loan being reviewed and approved. 79% of the loans or credit cards disbursed are to individuals with a CIBIL Score greater than 750. In short, the higher your score, the higher are the chances of your loan application getting approved.

How will you know your own score?

CIBIL report can be downloaded via CIBIL website and the entire process is paperless. Following are the steps to get access to your report as well as score.

  • To get a CIBIL report is very easy, you can log in to the official CIBIL website CIBIL.com and upload the required documents i.e. your address proof, id proof, your personal information and other relevant facts.
  • On filling up that form you will be directed to the page which asks you to pay a particular amount via your debit card, credit card or net banking.
  • On paying the money you will be redirected to the authentication page. You will asked 5 questions pertaining to your credit history, if you have answered 3 correctly, CIBIL will send your credit report through an email with 24 to 48 hours.
  • If your authentication fails, do not worry, you will receive a hard copy of your CIBIL report by post at the address you have provided.

Interest Rates

Two loans taken a year apart may have different interest rates. Similarly two individuals may take the loan of same amount but at different interest rates. This is mainly because interest rate calculation depends on a variety of factors and the underlying variables may vary from institution to institution.

What factors are considered in loan pricing?

At IIFL, we have adopted risk based pricing, which is arrived by taking into account broad 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 intimated by IIFL.

The details are also available on our website: www.iifl.com

What is Fixed Interest Rate?

Fixed interest rate means that the interest rate on your loan is fixed and does not change during the tenor of the loan.

What is Floating Interest Rate?

Floating interest rate by name implies that the rate of interest varies based on benchmark rate.

Information Sharing

While applying for a loan, any financial institutions requests for a few documents like bank statements or income proofs and also conduct address verification. All of these are essential to either help you understand your loan obligations or to counter any fraudulent activities that can impact customers.

Why should I share my income and obligation details with financial institutions?

Income and obligation details are required to compute the loan eligibility. We can then help you know the monthly loan obligation amount, which will help you manage your repayments well.

Why should I disclose my current residential address and office details?

Lenders may choose to conduct verification at the place of residence and/or office. This is done to check if there are any fraudulent activities done using your credentials and also to ensure that your information has been recorded accurately.

Why bank statements are required?

As part of financial due-diligence, your existing financial obligations and the credits in your bank account may be considered to arrive at the loan eligibility. Thus it is necessary to provide the latest bank statements.

KYC or Know your customer

Reserve Bank of India has mandated certain checks that have to be completed mandatorily before lending to any borrower. The standard terminology used for these checks is called ‘Know your customer’.

What is KYC?

KYC which stands for 'Know your customer' is used for customer identification process. It has two major components namely Identity and Address proof. This process helps to ensure that banks’ services are not misused.

What are the commonly acceptable KYC documents?

The Government of India has notified six documents as ‘Officially Valid Documents’ (OVDs) for the purpose of producing proof of identity. These six documents are Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Job Card. You need to submit any one of these documents as proof of identity. If these documents also contain your address details, then it would also be accepted as ‘proof of address’. If the document submitted by you for proof of identity does not contain address details, then you will have to submit another officially valid document which contains address details.

Frequency of KYC documents submission to banks/financial institution?

RBI has stated that KYC documents 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.

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