The mechanics of a loan application

You have recently made an enquiry about getting a loan for a vehicle and have applied for a credit card simultaneously. You have never dealt with these formalities in the past and have usually relied on your father or friend to do so for you. Now, naturally, you are curious to know what exactly takes place behind the locked doors of a bank with your application! Here is a simple guide for you to know how a loan application is processed.

1. Documents and verification – The first step that any bank takes is to collect your basic information and the details of what kind of line of credit you require and for how long you need it. The common documents you need to submit are your ID and address proofs, 2-3 photographs, bank statements, salary slips and details of present and past employment. Banks send authorised representatives to carry out personal verification of your employment and residence thereafter.

2. Contact credit rating agencies – Once you have submitted all these documents and you have cleared the verification procedures, the bank will then contact the credit rating agencies in India to get you credit score and reports. This phase is equally important as the first because many loans have been declined at this stage. When your report arrives, the banker will carefully look at all the details, payment history, comments, past loans’ details, details of your income and expenses and many other factors and will then decide if you are eligible for a loan or not. Your credit report is your history with loans and cards in the past laid bare for future review. A score of 750 and above is generally considered good (the maximum score being 900). If your verification comes clear and your CIBIL score and report are clear, as well, 90% of your loan processing is done.

3. Approval or decline – Once these checks are done, the bank will either inform you about the reasons for your decline (some even send a copy of your credit report) or will invite you for further discussions about the loan that you require. If it is the former in your case, you should carefully review your credit report and understand the definition of credit rating and factors affecting it with the help of a credit advisory company. If you have maintained your finances well, then you can expect a good rate of interest and requested loan amount from your banker. Associated terms such as low fees and rewards are also included with customer with exceptionally high credit scores. So the better your score, the better a deal you get from your bank.

4. Loan closing and funding – As the name suggests, in this stage, you sign the final documents and retain the copy that is given to you while the bank retains their copy and informs the credit agencies about the start of the loan. The money is transferred to your loan account or you get your card, and thus begin the story of your new line of credit!

As you can see, credit scores and reports play a very important role in, no matter what kind of financial institution you approach for credit. So do make sure you know more about credit scores, preferably from a credit rating advisory agency.

Your credibility is much more than your credit score

There is a misconception prevalent in India that if you have a poor credit score, it becomes impossible for you to get a loan or line of credit. While it is true that getting a bank’s nod to a loan, credit card or overdraft under such circumstances is difficult, it certainly is not impossible. A lender will look into much more than your credit scores before he decides to grant you a line of credit and decide its terms and conditions. Vis-à-vis, it also stands to reason that if you have an excellent credit score, that alone will not guarantee you a line of credit. Here are some other factors that will also be taken into consideration while your credit application is being reviewed by a lender:

1. Nature of employment – Most banks will consider which organization you work for. If you work for a reputed one that is known in the market for its stability and goodwill, you stand a better chance to get approved for a loan. In fact, most reputed companies have long-standing relationships with bankers and maintain their employees’ salary accounts with them. When you have a salary account of a reputed company with a bank, you automatically become a preferred customer. It is no wonder such salaried employees get so many marketing calls from banks!

2. Employment stability – From the above point, do you infer that only salaried employees are in the good books of lenders? That is incorrect. People who own their own businesses or work in different capacities in different types of organizations are also eligible for further consideration apart from credit scores. All working professionals’ employment history will be scrutinized, how long you have been in an organization and in what positions will also be evaluated. If you have remained in the same profession for a considerable amount of time, you are considered a good risk. People who change jobs frequently and change organizations every year may get a good pay hike but banks are wary of their flighty nature and will probe deeper into the circumstances of the job changes.

3. Longevity of accounts – This is one area where the adage “Customer is the King” certainly holds well. If you have any form of account – savings, recurring, loan, business or credit card account – for an extensive amount of time, your banker is assured that you will continue to generate business for them and that you will be paying them back their money. They will also be able to offer excellent interest rates and repayment periods so your good relation with your banker is also of value. You should also considering using your bank for other financial activities such as arranging your investments, insurances, etc. More business means better relations with your bank.

4. Personal circumstances – In a few instances, if you are able to prove to the bank that you are a citizen of good reputation and can be vouched for by your relatives and close friends, bankers will look beyond your poor score or a lack of it and may consider giving you a loan. These indeed is a rare occurrence and you should be able to prove that you had unavoidable circumstances due to which your credit history is not up-to-the-mark and you may still stand a chance to persuade the banker to take a risk with you.

Be prepared to pay a higher interest rate and with shorter repayment periods when you have a poor credit score but with an improvement in scores, you can certainly approach the bank for better terms of the loan/credit card.