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.