7 Factors that determine whether your loan gets sanctioned
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:
- Credit history: 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.
It doesn’t help if you don’t have a credit history as there is no premise to assess, such as no Credit Card or Loan availed in the last two years. However, you can address this by maintaining a Credit Card with no default in repayment.
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.
- Work experience: Banks weigh your employment history and current engagement to ensure that your source of income is reliable. A bank wants to be certain that your employer is financially sound, with no history of outstanding or delay in paying employees their salaries. Stability of your job matters too. Therefore, government jobs have the added advantage of being perceived as safe compared to lesser known private companies or self-employment.
If you’re working with an eminent institution such as a blue-chip company, your chances are equally good. Professionals such as doctors, CAs, engineers, and lawyers are also considered safe. The idea is that your capacity for repaying the loan depends on your income, so its source needs to be reliable and consistent. Banks prefer applicants who have worked longer in their present employment, as it also establishes stability.
- Age: Your age matters because it is indicative of your financially stability. You start working in your 20s and by the time you turn 30 you would have five or six years of work experience. So you are financially stable and moving up the proverbial corporate ladder with a better salary. As you progress further in the next 20 or 30-odd years you will have fewer earning years to repay your loans. Therefore, a loan application in your retirement years is likely to be rejected.
- Income: 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.
Similarly, many banks prefer applicants who have filed their IT returns and paid tax rather than those who may have filed returns with no tax liability as their income wasn’t taxable.
Your eligibility gets better if you can show additional sources of income, such as your spouse’s salary. This indicates better repayment capacity as you have more than one source of income to tap into. Joint loans are offered for the same reason – combining the applicant and co-applicant’s monthly salaries present more income to afford a higher loan.
- Repayment: 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.
- Collateral: 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.
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- Margin money: Generally, banks are willing to fund up to 80% of the cost of purpose of the loan and expect the borrower to arrange for the balance. However, if you can put in more than 10-20%, the bank will not stop you. Rather, it will recognise that you are willing to reduce the bank’s exposure to the default risk and approve your application sooner. The down payment you are able to make will have a huge impact on your home, education, car, or business loan eligibility.
Besides these super seven factors, your existing relationship with the bank counts too. If you have been a customer for a long time, your chance of getting a loan is better, especially if you have a clean record. Familiarity with your financial past helps the bank determine your current financial health. Moreover, with some banks, including HDFC Bank, you can not only check your eligibility but also apply and share documents online easily. Not only that, select pre-approved HDFC Bank customers get a loan disbursal within 10 seconds.
So, what are you waiting for? Go ahead and Apply for a loan today with HDFC Bank.
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* Terms & conditions apply. Loan disbursal at sole discretion of HDFC Bank Ltd.