Most people think loans are a huge favour from the gods of finance, and that having a loan application approved by a bank is a matter that requires a great deal of care and luck.
Collecting interest on loan repayments is the primary source of a bank’s business income. Without lending, the bank couldn’t collect interest with EMI repayments, and hence wouldn’t be able to turn a profit. (Eligible) borrowers are a bank’s bread and butter – and as long as you have no intention to defraud the bank – you needn’t chase banks to get loans, you can have them chase you to lend to you. That being said, people with bad credit histories, no clarity on how they intend to repay, no clear statement of intent as to why the funds are being borrowed, where the funds will be spent, etc. shouldn’t really wonder why their loan applications were rejected.
CIBIL? What’s that? It’s a Credit Information Company (CIC) like Equifax or Experian. What do they do? They record, collate, and organize details of your borrowing (and repayment) history with banks and other lenders, so as to generate a detailed report indicating your trustworthiness as a borrower.
This report is more detailed than you can imagine, and will contain information about which type of loan you’ve taken (secured / unsecured / home loan / personal loan / vehicle loan), when you’ve taken it, how much you earn, your employment history, your debt-to-income ratio, your borrowing limit, the EMIs you’ve chosen, the tenure you’ve chosen, any missed EMI payments, any loans that were “settled” or closed on different terms than on which they were taken, etc. All these details contribute towards increasing or decreasing your overall score – and it is this score (along with a detailed report) that banks look at when deciding whether a loan applicant will repay the loan or is just a person attempting to defraud the bank.
Historical behaviour with debt of any kind is counted as an indicator of future behaviour with debt. But, as everyone knows, if even one EMI is missed on any loan, penalty interest starts to compound, and it is very difficult to meet EMI payments after that – which throws all the EMI repayments for the entire tenure of the loan off balance – which means that the borrower has to reorganize the plan and work harder to make ends meet. This usually results in people paying a lot more in total than they thought they would, and also destroys their CIBIL score / CIC report.
So how can one raise a low CIBIL score? It isn’t easy, and it isn’t instant – but there are a few ways:
You would be surprised as to how many people simply approach banks only knowing that they need “x” amount of money to be credited to their bank accounts immediately, no questions asked. Banks will obviously spend a lot more time processing requests from such applicants and studying their credit histories, if they don’t deny them outright.
An applicant who knows exactly how much he / she wants to borrow, and communicates the exact purpose for this loan will be viewed more favourable by the bank than a person who just communicates an approximate amount for an uncalculated requirement. Let’s understand this with an example:
Mr. A finds himself in need of immediate funding as some medical expenses have cropped up. The total medical bill plus ambulance charges and sundry expenses is Rs.4,88,900, and this is the exact amount that Mr. A is short of, and it is the exact amount that he has to borrow. If he applies for a loan of Rs.5 lakhs, thinking that the remaining Rs.11,100 can be used for something else, he will be making the same mistake as many loan applicants. While the loan will be approved, the extra Rs.11,100 will also gather interest and end up being a larger amount eventually owed. If any amount borrowed cannot be directly linked to a pending expense, do not include it in your total loan amount. Ideally, Mr. A would have borrowed exactly Rs.4,89,000.
While it is true that personal loans, by definition, can be used for any purpose the borrower deems important – the fact also remains that the bank takes the final word on whether to lend to a certain party or not, as they are placing their funds at risk.
Put yourself in the bank’s shoes, and consider who you’d more readily lend to, given all things like CIBIL score, income, etc. is the same for both applicants. Would you lend to the person who gives you a reason as to why he / she needs the funds, or the person who does not state any reason on the loan application, and merely states the amount?
Obviously, you’d lend it to the applicant who states a reason, as it is an additional bit of information that could point towards the applicant’s ability / likelihood to repay the loan, or at least act as a statement of intent as to where the funds will be spent. The more information you can give the bank, the better your chances are of having a loan approved.
Most personal loans are taken by businessmen to establish new businesses or to fund the acquisition of business assets like machinery, tools, or land / buildings. Communicating to the bank that the funds will be used to purchase an asset that will enable greater profit generation is one of the easiest ways to get a personal loan approved. Once the bank knows that the loan amount will be spent in an attempt to generate more profit, it will be able to approve your loan knowing that the projected profit can be used to repay EMIs on time.
Let’s understand this with an example. Mr. A has a carpentry workshop but only uses hand tools. With his current hand tools, he is able to produce enough furniture to generate a profit of Rs.40,000 every month. With power tools, he would be able to work a lot faster and generate up to Rs.90,000 every month, as he would have a lot more furniture to sell. The power tools he requires cost a total of Rs.3,50,000. He approaches the bank for a loan of Rs.3,50,000 and presents them with a detailed report stating which tools would be bought for what amount, with quotations from machine-tool dealers. He also informs the bank how the tools would be used and for what purpose, and how much more furniture he could make with these new tools – which would result in a higher profit. This higher profit will be used to repay the EMIs as and when they become due. The bank basically needs to know that the loan will be repaid, and any information that points towards that will always work in the favour of the borrower, instilling confidence in the bank.
The EMIs you pay each month will be higher or lower depending on the tenure you choose. Most people take an extremely long tenure thinking that the burden of EMIs will be greatly reduced – which is true – but in the long run ends up exhausting their funds, as the eventual total loan amount will be higher. The reason for this is that the interest component of the repayment amount, which is paid off before the principal component. Another problem with long-tenure loans is that there are many unforeseen events that could come to pass at any time, hindering the borrower’s ability to repay somewhere down the line. It’s impractical and overly-ambitious to state that absolutely nothing can come in the way of EMI repayments over the long term, as life is uncertain and no one can tell the future.
Reducing the monthly burden may seem like a smart move, but borrowers must also consider the fact that a stable and regular income is vital when it comes to repaying loans, as even one missed EMI could push you through the gates into the hellish pit of inescapable debt as penalty interest is designed in this way. Most experts on the subject suggest utilizing up to 50% of your monthly income to clear off EMIs as soon as possible, putting 20% aside as savings, surviving on the remainder.
Clearing off EMIs fast is the best way to stay free of debt and headaches. Borrowers must use as much of their disposable income as possible to pay off EMIs, and clear off loans as soon as they possibly can.
Before borrowing or sending applications to banks, use one of the many EMI calculators on the internet to determine how much you would end up paying each month, and the total tenure it would take to clear off the loan. Once you send out an application, the bank will pull your CIBIL or other CIC’s credit information report. The more banks that pull your credit information report, the worse your score eventually becomes. Be sure of your requirements, and approach a bank which should not have any reason to reject your application.
This is a highly underrated step that many people overlook. There are other banks that offer loans – not just the one with which you maintain a bank account. If you’re sure about taking a personal loan, find out which bank offers the lowest interest rate and the best terms. While most terms and conditions for personal loans are the same across all banks, there are some lenders that make the repayment process a lot easier with friendlier terms and conditions, and less severe penalties for missed EMIs, etc.
It’s also worth noting that personal loans aren’t the only sources of quick credit. There are gold loans (loans that you can take by placing a certain amount of gold as collateral), loans against fixed deposits (loans that can be taken by placing your fixed deposit and the entire value of funds therein as collateral), and loans that can be taken out against pretty much any type of valuable security like vehicles, properties, assets, etc. But as far as unsecured loans (those which do not require collateral) are concerned, personal loans are your best bet.
Don’t be dejected if one bank rejects your loan application, there are likely other banks that would happily lend to an applicant with your eligibility and credentials, provided you approach the bank in the right way with the right documents, quotations, projections for potential profit, or some kind of proof that the bank can trust with you with the loan – depending on your particular requirement for funds.
Avoid making simple mistakes while applying for a loan, and you won’t have your application rejected.
Take a few proactive steps and instil a sense of confidence in the bank in your ability to repay your loan, this has been proven to work in many cases where applicants have low CIBIL scores as well. You can even approach the bank manager directly and state your case in person.