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.

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