If you have a good credit score from a credit bureau, it is not necessary that you may get a loan at a lower rate. But you could get your loan faster and with fewer checks by the lender. Process differentiation is the first advantage that customers can look forward to as a result of their good credit scores. The second advantage would be the rate differential, which may take some more time, said Mohan Jayaraman, MD, Experian Credit Information Company of India.
A credit score is a number that indicates the borrowers potential to repay and chances of default. It indicates the creditworthiness of the person. Banks and lenders now increasingly rely on credit scores, which are given by credit bureaus, to decide if the loan should be approved. Usually, the higher your score, the more are the chances of your loan application getting approved.
Explaining why banks are not yet offering lower rates for customers with a good credit score, Jayaraman says that for Indian banks consumer lending segment is a fairly low margin business. So, their aim would be to keep margins steady. But many banks have now started making the process simpler for customers with better scores.
For example, for a customer with a good score, the bank may do away multiple field investigations. If normally the bank conducts two field investigations before approving the loan, in this case the bank may do with just one.
Similarly, the turn around for approving the loan could be faster in case of a customer with a high credit score. For instance, the bank may approve the loan of a customer with a good credit good within one or two days, while for other customer it may take up to a week.
Unsecured loans, such as personal loans is where the differential, especially the rate differential is likely to be seen before other segments, since the margins are higher in that segment.
In personal loans, some banks offer better deals for customers of a particular profile, such as those working in a particular company and who may have their salary accounts with the bank. Or customers who already have a banking relationship with the bank.
“‘Eventually the credit score bank will be a new segment for banks to approve the loan. For instance, banks will say that borrowers in certain band will get better scores,” Jayaraman said.
Shyamal Saxena, general manager, retail banking products, Standard Chartered Bank said that the market will eventually evolve to the pricing differential based on credit scores. As of now for a customer with a good score, banks may do fewer verification. “The retail credit penetration in India is still very low and there are a large number of customers for whom banks will do the extra verification,” he said.
Customers can know their individual scores by accessing the individual credit report from credit bureaus.
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Courtesy : Business Standard