Have you ever wondered how many documents banks require before giving a loan? We all have always heard how slow our bank systems are and how much trouble a person has to go through before getting a loan. Getting a loan can seem like a complex process, but understanding what banks look for can make it easier. Here’s a straightforward and simplified guide to help you understand the key factors banks consider before approving your loan.
- Your Credit Score –
- What is it? – Credit score is a number that represents your creditworthiness whereas Credit history is just like a black box of your borrowings. Your credit history is a record of your past borrowing and repayment behavior. Your Credit score and credit history are one of the biggest variables on which banks rely while providing a loan.
- Why is it important? – Banks use your credit score and credit history to assess the risk of lending to you. A higher score means a good credit history which is attained through a track record of repaying debts on time, makes you a safer bet for the bank for lending. A better credit score can get you a favourable interest rate for your loan.
2. Income and Employment Stability –
- What is it? – Your income level and job stability reflect your ability to repay the loan.
- Why is it important? – Banks prefer borrowers with a steady income and stable employment. It reassures them that you have a reliable source of money to make your loan payments.
3. EMI-to-Income Ratio –
- What is it? – The Emi-to-Income ratio compares your monthly debt payments to your monthly income. It is another factor that banks keep in mind while lending any loan amount to you.
- Why is it important? – A lower EMI-to-income ratio indicates that you have more disposable income to repay the loan. That means even after paying all your debts you should have a sufficient amount with you. In India banks generally prefer an emi-to-income ratio of 40% or less.
4. Collateral –
- What is it? – Collateral is an asset that you pledge as security with the borrower while you opt for the loan. Examples of the most popular collateral are – property, your vehicle, and investments.
- Why is it important? – Pledging assets as your loan’s collateral makes your borrowings a secured loan. This reduces the bank’s risk as if you default on the loan, the bank can seize your asset to recover its money. Due to this security, you get loans at lower interest rates in secured loans as against interest rates on unsecured loans. With a Loan Against Mutual Funds, you don’t need additional collateral. Using your mutual funds, you can quickly secure a loan through a simple 5-minute process. So why wait? Calculate your Loan Against Mutual Fund using our LAMF Calculator.
5. Loan Amount and Purpose
- What is it? – The loan amount that you want to borrow from the bank and the reason for the loan.
- Why is it important? – Banks need to ensure that the loan amount aligns with your financial situation and that the purpose is legitimate and sensible. Many clauses in the bank’s loan agreement clearly state where you cannot use the loan amount. In many cases, banks prefer to pay directly to the service provider such as Education Institution for Education loan, Builder/Seller for your Home loan, Auto Dealer for your car loan. This is to avoid any disconnect between purpose and end-use of the loan.
6. Savings and Investments
- What is it? – The savings and investment portfolio that you have with you.
- Why is it important? – Having substantial savings and investments shows the bank that you are financially responsible and have a backup plan in case of emergencies.
8. Documentation & Due Diligence
- What is it? – A Bank requires many documents for verification before the disbursement of a loan. The main documents that you will be asked to submit are – PAN Card, Aadhar Card, Collateral document, etc.
- Why it is important? – After receiving your loan request, the bank performs its due diligence which is a feasibility study to understand the risk associated with the loan. All this is done by analyzing various documents provided by you.
Tips for Improving Your Chances of Getting a Loan –
1. Check Your Credit Score: Your credit score is one of the vital parts of your creditworthiness. Regularly monitor your credit score and work on improving it by paying bills on time and reducing debt.
2. Maintain Stable Employment: Switching jobs frequently and not having economic stability is a big factor for banks that they look at before giving a loan. Try to stay in your current job or field for a longer period to show job stability.
3. Reduce Existing Debts: There is a limit that banks are allowed to give you as a loan on your income. Therefore always try to pay down your existing debts to lower your debt-to-income ratio so that you can get a loan amount according to your needs.
4. Save More: Giving a loan is a risk for a bank, that’s why they always look for collateral or savings in banks to check your creditworthiness. Always try to increase your savings to show financial discipline and readiness for emergencies.
5. Prepare Documentation: With a technology change, the requirements of providing many documents have been reduced to a few documents. Gather all necessary documents, such as pay slips, tax returns, and bank statements, to make the application process smoother.
Understanding these factors can help you better prepare for a loan application and increase your chances of approval. Remember, the key is to demonstrate that you are a low-risk, reliable borrower.
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