Saturday, December 12, 2015

4 Things to check before applying for a Loan

Loans have become an integral part of modern life. Most of working people access loans to achieve various financial objectives, ranging from buying a house, funding child education, buying a car or a consumer durable. There are people who even take loans to fund their vacations. Based on the loan type a person may be required to keep collateral or may be able to get a cash loan. Home loan, gold loan, vehicle loan are few examples of secured loans where the loan is secured against the collateral. A personal loan, credit card are examples of unsecured loans.

Not all loans that get applied are approved by lending institutions. The loan applications undergo the underwriting process where it is reviewed on various parameters. Let us look at four highly important things that one should be reviewing before applying for any credit facility. 

Check your eligibility

Eligibility to repay the loan is of high importance. Not only from the approval of the loan application but also from personal perspective. While the lending institution checks on the income to decide how much loan you shall be eligible for, not every expense actually gets captured in the evaluation process. It is only you who would know the exact extent of your expenses. It is highly recommended that you should calculate your own eligibility based on your actual expense. At any given point of time, your EMIs and other outstandings should not be more than 50% of your net income. Any amount higher than this can lead to financial stress and non-payment of obligations. 

It is important for you to know that the non-payment leads to impairment in CIBIL report and can lead to outright rejection of all credit facilities that you may want to apply in future.

Check your credit score

It is highly recommended that you check your CIBIL score before applying for any loan. The credit scores not only play an important role in the approval of loan but can also have a direct bearing on the rate of interest being charged. A low score can lead to higher interest getting charged and hence will impact the EMI being paid. The score can be low for three primary reasons:
  1. For Impairments and Repayment issues on credit facilities in the past
  2. For an error
  3. For Low Activity
In case the score is low, it becomes important to know the reason for it and working to improve upon it. One can also get in touch with Credit Counseling Companies to seek help on improving the credit health.

Check product that suits your requirement

There are various products available from different lenders. You can look out for the product details given on the websites of various lenders or can check various product offerings through websites that give comparison and extensive details on all lending institutions extending a particular type of loan or credit facility. This shall help you in identifying the product that suits your requirements.

Interest rate 

Interest rate getting charged on the loan may have some variation from one lender to the other. So it is important to check on the same before applying for loan. A higher interest can have bearing on the amount of monthly installment being paid. In fact, an incremental interest of 1% on a home loan of Rs 50 lakh can result into an additional payout of about Rs 10 Lakh in interest over 20 years of loan tenor. Therefore getting to know the interest rate is to your benefit.


Since a loan or any other credit facility can grossly impact the finances and financial life of any individual, it is extremely important to check on the above factors, most importantly your CIBIL score before submitting application with any bank or lending institution.

This Blog Post was Sponsored by 

About the Author: This guest post is written by Mr Arun Ramamurthy, the co-founder of Credit Sudhaar, a company which aims to spread awareness about importance of credit health and help people improve their credit score . He also co-authored the book ‘Unlock the Power of your Credit Score’.

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