Ever wondered how banks and NBFCs determine your credit worth or in other words, how much loan you are eligible for and at what rate? We tell you about the different factors that play a crucial part in determining the same.
1.Income – Any lender would want to be sure about his borrower’s repaying capacity and this is reflected by earnings. Gross monthly income and debt-to-income ratio are important factors that are considered. A healthy debt load is around 35% while anything around 45-50% can lead to rejection of loan. For example, if you earn Rs. 50,000 a month, an EMI load of about Rs. 17,500 a month is acceptable. However, if you touch EMIs of about Rs. 22,500 a month, your ability to get and repay loans will be compromised.
Salary Components: Please keep in mind that many lenders do not consider salary components such as travel reimbursements, LTA or medical allowance when calculating monthly income. The rationale is that lenders consider these allowances as a payment for an expense that you have already incurred.
2.Existing loans and liabilities – It is important to know that a debt-to-income loan is not determined for every loan individually, but for all the loans you may be servicing. For example, if you are paying an EMI of Rs. 5000 for personal loan and Rs. 6000 in car loans when your monthly income is about Rs. 50,000, your debt-to-income ratio is already at about 22% and Lenders would be okay to give you another loan only if its EMIs do not exceed Rs. 8000-9000 a month.
3.Credit Score – Credit Information Bureau Limited (CIBIL) started operation in 2000, followed closely by Experian. These credit scoring companies record repayment on existing loans and credit cards on a monthly basis, basis which they assign a credit score which is generally considered a barometer to assess risk associated with each borrower. A good credit score helps reduce rate of interest and increase the quantum of loan. CIBIL says that a credit score greater than 750 is good and 79% of such loans get easily approved.
4.Credit Cards – Many do not realize that every credit card outstanding adds to your debt liability and pushes your debt-to-income ratio higher. To calculate your debt load the minimum credit card payments you are required to pay each month is taken into count, which is in fact may be far less than your total outstanding. What can affect you more is if you have spent more than your total credit limit and now struggling to repay back. Credit card debts are keenly watched by lenders as they also provide a good picture of financial discipline.
5.Age – If you are young, your ability to borrow goes up considerably because it is assumed that you will have a longer career and hence can take on higher amounts and longer tenure. However, if you are towards the fag end of your career, your ability to raise bigger amounts in loans will come down significantly.
6.Job Profile – A permanent job with a good sense of job security enables you to borrow more, while a freelance job or a job in a sector that is perceived as risky will cut down on how much you can borrow.
7.Thin file – Lenders want to know your credit profile and how responsible you have been with money. However, when you are young and have little or no credit background, you are categorized as a “thin file” borrower. Hence, it’s important to have a credit record by taking credit cards or asset-building loans like home or car but managing them responsibly.
A good P2P lending site uses technology to evaluate data points which are far greater than what traditional lenders cover. For example, Faircent has an agreement with TransUnion to leverage its capability in data, analytics and technology in its algorithmic underwriting.
Faircent is also the first online P2P lending platform to use TransUnion’s Aadhar based eKYC module, which maps potential borrowers on multiple identity points in real time. It appraises over 200 data points to evaluate the risk profile of borrowers on its platform, which includes their social, financial and personal data through bank statements, credit card, actual physical verification etc. This means a borrower with even a thin file can expect a far more accurate assessment.
Traditional or tech-enabled lenders - At the end of the day how much you can borrow is a combination of a number of factors; But a common thread is how responsible you have been with your money.