Have you heard the story of a nomad who found a magic lamp and wished that whenever he poked his hand in his pocket he always had an exact amount of money to pay for his needs? So whether he wanted Rs. 10/- to pay for a rose or buy a car worth Rs. 10 Lakh, he always had the entire amount in his pocket. Most would assume he would never need a loan. But what most don’t know is he would never be eligible for a loan. He had no proof for the source of his income!
Well, there are no magic genies in the real world. Getting a loan can be a challenge in itself. Proving your income is another. Income is a major determining factor of your eligibility for any loan. Your high income can make a loan officer overlook minor indiscreet items in your credit report. With high income and low debt, it is possible for a lender to turn a blind eye to your marginally low score. On the other hand, if you have a low income, inspite of having a high favourable score, displaying your good intent to repay your debt, you may not be eligible for loans. How much loan you can take relies heavily upon your income. Let us elaborate in detail below.
Credit Score and Income
It is true that while calculating your credit score, your income is not considered. Infact, it may not even get recorded in your credit report. However, you are required to submit your income and employment proofs with the bank whenever you seek a loan. While your score reveals your intent to repay your borrowings, your income indicates your ability to repay your loans. So, with a high score you may be able to display your good intent to repay your lenders, but if you have poor income, you will not be able to live upto your commitments. A good intent is of no use to the lender if you are not in a position to reimburse your borrowings.
On the other hand, let us say you are in a good income range with a score of 650+ then a non-conservative lender may lend you albeit at a higher rate of interest. Your application may not be entirely declined owing to your high income.
If you are declined a loan for low CIBIL score then work towards improving your score. Your score is not etched in stone and it can be increased . Give priority to your repayments, avoid being late, dodge the temptation to shop excessively using your credit card, be realistic about your income, set achievable financial goals, try to fund expenses from your own pocket and ask for a loan only when you have calculated how you will repay the debt. All these measures will help your score to escalate with time. A high score also helps you negotiate a lower rate of interest.
Loan Eligibility and Income
You pay for essential goods and services from your salary. Therefore, lenders assume that atleast 50% of your income is reserved towards your investments and other expenses. Don’t try to blow your income out of proportion just to prove you are eligible for a particular loan. Under reporting your income will diminish your chances of approval while over reporting can lead to criminal charges if you fail to repay your debt obligations.
Whatever figures you claim your income to be, make sure you can prove it in documents. Any unrecorded cash transactions that you estimate should be counted towards your income, may not be considered the same way by your lenders. If you are a salaried employee, your monthly salary slip figure & performance bonus, if any, is all that the bank will consider as your income. You could submit proofs of any rented property to be counted as your income or your spouse’s salary slip too, if the bank allows.
Role of Debt-Income Ratio
The thumb rule is that the cumulative ratio of EMIs to your monthly income should not exceed 50%. If you are already paying EMIs upto this limit then you will not be eligible for taking further credit. The following example will make it clearer.
|Name of Borrower:||Mr. Rajat Gupta||Mrs. Sharvani Nair||Mr. Neil D’Souza|
|Amount of Home Loan:||40 Lakhs||40 Lakhs||40 Lakhs|
|Tenure:||120 months||120 months||120 months|
|Annual Interest Rate:||10%||10%||10%|
|Monthly Salary:||1, 50, 000/-||2, 00, 000||95, 000/-|
|Additional Home Loan EMI:||52, 423/-||52, 423/-||52, 423/-|
|Existing Car Loan EMI:||12, 500/-||45, 000/-||0|
|Existing Personal Loan EMI:||0||60, 000/-||0|
|Existing EMI to Income Ratio:||8.3%||52.5%||0%|
|Eligible:||Yes for full loan amount||No. Existing EMI to Income ratio > 50%||No. Eligible for a loan of not more than 30 lakhs.|
In the above example, three loan aspirants have applied for the same loan. Their incomes are different and it leads in determining their eligibility. Mr. Gupta is eligible for the full loan amount while Mr. D’Souza has hope of getting a loan less than the value he has asked for. Although Mrs. Nair has the highest income, her loan application will be declined as she has already exhausted her limit of 50% of her income in existing EMIs. What’s best for her is to first pay off one of her loans and then reapply for a new loan. This will also help her to increase credit score.
Income and Business Loans
Businesses constantly need loan for meeting their day to day working capital requirements, purchasing inventory or for expansion. Businesses too need to prove their viability of income for seeking any advances. An industry expert shared, “Companies need to submit last three year audited financial statements and income tax statements. Preferably, their debt to EBITA cannot exceed 5 times to be eligible for loans”.
As an individual or a business owner, we all feel the need for a loan at some point of time. Borrowed funds leverage our purchasing power. More than anything else lenders want their money to be repaid. Thus, unless you prove to them your valid & steady source of income, lenders will be wary of lending. By inflating your income figures only to be eligible will prove to be detrimental to your financial future. It is better to go for smaller loans and repay them in full before you apply for further loans.