Be Worthy To Borrow

Don't just walk into any bank for a loan. Do your homework before you apply as rejections impact your credit-worthiness.

Pritam P. Hans        Print Edition: March 2011

Are you planning to buy your dream house? If you already own one, then you may be in a mood to renovate it. Whether it is a home, a car or a brand new personal theatre, chances are that you may need to borrow to get the objects of your desire. That may seem like a cakewalk with banks actually getting their executives to regularly call you with information about their loan and credit card offers. It might not, however, be that simple as you first need to ensure that you meet the eligibility criteria.

Can You Pay Back?

The cardinal step for any lender, before approving a loan is to gauge your repayment capacity. Any bank will first check your periodic cash inflow to assess whether you will be able to service the loan on time If you are a salaried employee, your lender is not just interested in your salary but also the organisation you work for. Banks actually charge a lower interest rate if the borrower is employed with a reputed company vis-à-vis someone working for a small private firm.

30-50% is the maximum you can pay as an EMI on your home loan.
Also, your experience or the number of years you have spent in a particular profession or a particular job influences your chances. If you have been job-hopping every six months or one year or are the kind of person who likes to do different things every year, you might as well forget about the loan. For instance, if you apply for a personal loan at HDFC Bank, you should have completed two years in employment and at least one year in the current organisation.

Your application is likely to be rejected if the EMI (equated monthly installment) for the loan is more than 30-50% of your monthly income. To enhance your repayment capacity, you can treat your spouse or a parent as a co-borrower. Banks generally, only allow parents-son and husband-wife combinations for joint loans. All other applications for joint loans often don't go through as the chances of disputes in such cases are higher. Any rental income will also be considered as a part of your repayment capacity.

A home loan is easier to get than any other loan as the bank sees a lower risk associated with it. "Suppose a person is facing a financial crisis. House being a prime necessity, he is more likely to cut down other expenditures rather than stop his home loan repayment," explains Vivek Arya, deputy general manager, retail banking division, Punjab National Bank.

Some bankers say the ideal age to take a home loan is 30 to 50 years.
And, the bank always has the house as collateral, he adds. If you are a self-employed person or run a business, banks will ask you for your income-tax returns as well as profit-and-loss statements for the last three years. Banks-especially private banks- short-list you on the basis of your profession. For instance, the range of loan products for lawyers is limited. Some banks, such as ICICI Bank, do not offer personal and business loans to lawyers.

Once Bitten Twice…

"In case of any loan or payment default, big or small, your loan application can be rejected," says Arya. According to a Reserve Bank of India (RBI) mandate, all banks and lenders are required to pass on information on every credit transaction to a credit information company such as the Credit Information Bureau India Ltd (Cibil) and Experian Credit Information Company. This helps lenders, to study the credit history of individuals and companies, by looking at the credit information report of a borrower.

Even a poor repayment history- including delayed payment- will show up in your credit history. And that is not all. "If your loan applications keep getting rejected, it may hurt your prospects of getting any kind of loan. Every rejected loan gets reflected in your credit report," Arya says.

It always makes sense to get a copy of your credit information report for a small fee before you apply for a loan. It is not uncommon that a person who has repaid all his loans is listed as a defaulter.

In case of any discrepancy in the credit report, you should get in touch with your lender or financial institution and ask them to rectify the error.

Lifestyle, Age Do Matter

Loans have often been rejected merely because the potential borrower lives in an area categorised as high-risk by a particular bank. Different banks have their own list of avoidable localities, across the country. But more important than that is the age of the loan seeker.

Opinion differs on what is a good age to go for a loan. "If you are young, you have more time to repay the loan. Young people get the advantage of tenure," says Bhaskar Niyogi, chief general manager, real estate, habitat and housing development, State Bank of India.

But then, you may have a longer tenure in your youth but lower stability. "The risk of default due to a borrower relocating to a new place or changing jobs is more with younger people," says Arya.

When you go to a bank with which you have a salary account, you are a preferred customer for a loan.
Vivek Arya
Deputy General Manager, Retail Banking Division, Punjab National Bank
The ideal age, according to some bankers, for buying a house on loan is between 30 to 50 years, when you have an established career but are not over the hill yet.

Trouble-free Borrowing

If you want to avoid the hassles of borrowing for a house, go for a preapproved project. The lender has already analysed the title of the property and technical aspects of the building along with the reputation and past record of the developer, and will process your loan faster. If you plan to buy a pre-sold property, however, it is advisable to get the ownership verified before approaching a bank.

You can avail of a home loan up to six months after the purchase of a property. Beyond this period, your home loan application will not be accepted. In this case, you can avail of a loan against property, but you will not be able to enjoy the tax benefits and the interest rates will also be higher.

For a home renovation loan, consider approaching the bank with which you have an existing home loan account. If you have been servicing your loan well, your lender will be more than willing to offer a top-up loan or an overdraft facility. An existing relationship with a bank always works in your favour.

"When you go to a bank with which you have a salary account, you are a preferred customer," says Arya. Banks also offer lower interest rates to its existing customers. You can also avail of top-up loans and overdraft facilities. So, next time you think of taking a loan, you know how to enhance your credit-worthiness.

  • Be clear on property title
  • Go for a reputed developer
  • EMI should be less than 50% of gross salary/income
  • Stable career/employment
  • Margin should be 10-25% of loan
  • Good credit record
  • Identity proof
  • Proof of address
  • Get the ownership verified, if buying a pre-owned property
  • Try approaching the bank where you have a salary account

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