Do You Know Personal Loan Interest Rates Depend On Your Profile

Do You Know Personal Loan Interest Rates Depend On Your Profile

Personal loans can come to your rescue in many conditions as they can be used for multiple reasons right from a medical exigency to a buying a consumer durable. Personal loans are unsecured loans, there is no asset backing them hence they are a risky proposition for the lender in case the borrower defaults. This makes personal loans one of the most expensive loans; the interest rates are much higher as compared to other loans like a car loan or a house loan which are asset backed or an education loan which is usually given at lower rates due to obvious reasons.

Loan Application Acceptance……..

Each loan application is accepted after due deliberation and after the necessary documentation is completed. For all loans the prospective lender will have a look at the applicant’s credit profile before accepted the loan application. A healthy credit score will pave the way for the application being accepted while a low score will get it rejected. This is for all loans but when it comes to personal loans, even the interest rate is influenced by your credit profile.

Credit Profile Explained……

All banks lend to borrowers with the intention of not only earning interest but also want to be sure that they will recover their capital. They would like to assess the applicant before sanctioning a loan to any one of them. For this purpose they create a credit profile of the applicant. This credit profile is created based on various parameters like the income, education level, employment details, age etc; all these factors put together help the bank assess the credit worthiness of the applicant.

Just like the applicant is likely to use an EMI calculator for personal loan to assess his readiness the bank will use its owns set of tools to assess the applicant.  A person who has a good track record of repaying loans and credit card dues in the past will have a good credit score while some who has defaulted on paying dues in the past will have an adverse credit rating.

Why is the Credit Profile Important for Personal Loans?

For each loan the banks lay down eligibility criteria and have an advertised rate of interest rate. The first thing is to get the application accepted; this depends on whether you fulfill the laid down criteria. Then comes the interest rate; based on your credit profile the bank may be willing to offer you better rates.

So if the borrower has been working in a reputed organization he/she is likely to get a favorable rate as compared to a person who keeps job hopping and is working in a lesser known company. Similarly if you have a good credit score you can expect to negotiate a favorable interest rate for yourself.

For example if you check rates then you will find out that HDFC personal loan is available at rates ranging from 11.49% to 20% while Citibank offers them based on customer profile starting at 11.75% and SBI offers them from 12.55% to 17.65%. So why is there a range of interest rate and some banks directly state that it is linked to the customer profile.

Since personal loans are not backed by any asset the banks have more to lose in case of a default, there is not asset to repossess. By looking at the credit profile of the person they assess the risk associated with him/her and will base the interest rate on the perceived risk posed by the applicant. Higher the risk perception higher the interest charged by the bank and vice versa.

So if you are looking for a personal loan get your credit profile in a good shape so that you can get loans at lower interest rates.  A stable job, good repayment records can help and in case required one can opt for a co-applicant or a guarantor too.

5 hacks to improve CIBIL Score to Buy a House

Credit score is a magic number. If you have a good credit score such as 750 points or above, you have a power of acquiring desired loan whenever you want. On the other hand, with a bad score you either need to pay huge interest component or get a co-signor by your side to avail the credit.

 

Thus it is very important to plan your expenses and credit requirements. Particularly, for the long terms loans such home loan you should plan how to draw a credit. For example: if you check out home loan interest rate offered by any of the bank, say, ICICI home loan interest rate, you would find that interest rate varies a lot as per the credit score. So, you should always have a good score to get a credit deal of your choice.

 

However, if in case your home loan application is rejected you should not lose heart rather you must try to learn how to boost your credit score. For, you can always work upon a bad score and improve it to a decent level and get the loan application approved.

 

Let’s explore 5 hacks to improve CIBIL Score to get a home loan at ease.

 

  1. To err is human, so is to rectify. When you are fighting the odds of low score, it is practical to review your credit information report and check for errors and disputes. A slight discrepancy could be a major factor of low score. Particularly check for errors such as loan overdue or errors in personal details.

    Sometimes balance of your account is incorrect in your report due to a missed credit information update from the bank and it damages the score. So if you come across “due account balance” where it should be closed, do raise a dispute to CIBIL and get the correction made as soon as possible. If your application was rejected because of your name in cibil defaulter list or missed payment, it would certainly be accepted after the red flag is removed.

 

Similarly check out for other errors on the report and ensure these are not the reasons for low score. The CIBIL dispute resolution would take approximately 30 days to get the desired changes made.

  1. In case error is not an issue for low score, you need to look for other reasons to improve the score. You need to make a proper repayment plan. Here are some tips-
  2. Have a strict financial discipline. Cut down expenses and follow a strict budget. Until you reduce your expenses and save more than before, you would not be able to spare enough to pay out.
  3. Try to pay out maximum number of loans and continue with fewer debt. It would be a smart move if you could release the costliest debt, the ones with higher interest rate first.
  4. If a credit card bill is too fat to clear on a one go, it would be better to look out for avenues to close the outstanding. You can even consider selling out some assets for clearing the bills. However do not cancel the card and keep your card utilization up to 20 per cent as this would help you build good history.
  5. Always pay your dues on time; even better, if you could pay before time every month.

 

  1. Sometimes it is not easy to improve score in a few months. Herein, it would be wise to co-apply with a person who has a good score. Co applying with parent or spouse is a very good option indeed.
  2. This is one option not many would consider, however I would suggest that you should be willing to pay higher down-payment when you want a home loan. With higher down payment, amount of loan decreases and risk of loan declines too. Home loan is a long run loan so you can use floating interest to cap the interest benefit in future as well. The choice is all yours.
  3. If popular banks are not willing to lend you the desired loan, you should consider smaller banks, such as regional banks, co-operatives or family banks. Sometimes you might find a deal of your choice with a smaller bank. So never ignore such options. However this would require you to do some research and prepare a list of available credit options.

Whatever method you employ to apply for a home loan, the recourse for the application approval would always be your score. So always build the score before applying for mortgage or home loan.

Beware Of Personal Loan Fees

Personal loans are the most easily available loans; this is to say that getting a personal loan requires almost negligible documentation. The lender looks at the income level of the applicant; if the credit score is healthy and the applicant matches the income eligibility set by the financial institution then getting the personal loan approved is a cakewalk. Some FIs may sanction this loan within twenty four hours too.

 

A Little More About Personal Loans……..

Moreover personal loans can be used for any purpose thus they can come in handy at various occasions and the borrower can use them for varied reasons. Well all this may sound very lucrative but remember personal loans are unsecured loans which means they have no asset/collateral backing them. This makes them risky for the lender; the FI has nothing to fall back upon in case the borrower defaults.

 

The rate charged by any lender for the loan is commensurate with the risk associated with lending to a particular individual. Thus higher the risk perceived higher the interest rate charged; personal loans due to their inherent quality are risky for lenders hence are almost the most expensive loans available in the market. If one looks at personal loan interest rates, they will realize that they are way higher than other loans like car loan, education loans and home loans.

 

Personal Loan Fees:

As we discussed above these loans are available at very steep rates but apart from the EMIs you need to be pay every month, there are other fees also to consider. Though applicants focus a lot on the interest rate charged by the lenders for the loan the often forget to consider the other fees and charges which can prove to an equally big burden.  Some of these fees may be known to the applicant while some may not be and they may realize this only when they are asked to pay it.

 

Some of the fees charged by lenders include documentation fees, processing charges and charges on pre payment of the loan. While these are some routine charges and are charged for all applicants there maybe some charges which might be incidental like the cheque return charges or late payment charges which may be due if the borrower defaults on a payment or a payment is delayed. Apart from that a charge maybe levied on the outstanding amount every month; this will be over and above the applicable interest rate.

 

Processing fee on a loan ranges from 2% to 3% on a loan depending on the bank’s policy. So for a loan of Rs. 300,000 you will have to shell out an amount anywhere between Rs. 4,000 to 6,000. Though pre-payment penalty is frowned upon by the RBI and most lenders have done away with it, some lenders may still continue to charge it and this also varies from 2% to 3%. Some banks may impose penalty if the pre-paid amount exceeds a certain loan proportion or is repaid within a certain time period and so on. Documentation and administration fees also need to be checked.

 

Let us consider a few examples; HDFC Bank charges nil processing fees, allows pre-closure after first year and charges 4% of principal outstanding amount. ICICI Bank charges Rs.1149 to 2.5% of the loan amount as processing fee, allows pre-closure after 6 months and pre-closure charges are 5% of outstanding amount. Some other charges include PDC charges, cancellation charges, swapping charges, duplicate NOC charge etc. As said earlier some may or may not be charged by various lenders, some are incidental too. Processing fees charged by Kotak Mahindra Bank is up to 2% of the loan amount while Standard Chartered Bank does not charge any processing fees.

 

Why are these Fees Important?

The lenders when advertising their loans talk about only interest rates and nothing else. Often these fees remain hidden from the customer till he has applied for the loan and the ball is set rolling. Then it might not be able to reverse the process.  One may end up realizing that the lowest interest came with high charges thus making it more expensive than expected. Processing fees cheques are not returned even if the loan is not accepted so make sure you are sure about all these aspects when applying for the loan.