Loan against salary

Loan against Salary is one of the least exercised options during a financial emergency.  The objective is to share all the possible alternative sources of funding with readers. Due to the myopic view of Personal Finance, a person will never come to know that he can raise funds through existing resources / assets. Loan against Salary is one such option for salaried class which is least known in India. Loan against Salary is nothing but another form of either overdraft facility or Personal Loan but the process is convenient and hassle free. Moreover, Loan against Salary is bundled with benefits which are missing in a personal loan or overdraft facility.

What is Loan Against Salary?

As a 1st option, you can avail Loan Against Salary from your employer but only very big organizations provide this facility. You can approach bank only if your organization does not provide any kind of loan facility to its employees. Organizations offer such loans at dirt cheap interest rate of 2% – 5%. It is more of a retention tool for organization i.e. to retain the employee. Therefore, it is only extended to top performing employees. In this post, we will discuss availing Loan Against Salary from the bank with which you your maintain salary account. In this case, the bank has financial relation with both i.e. organization and the employee. In short, the bank has a risk profile of both the parties for ready reference. Lets get clear that  Loan Against Salary cannot be taken as granted. Approval is solely at the discretion of a bank. Some banks put a restriction that an employee should be working with the organization for say 3 years or 5 years to avail Loan against Salary.

Normally bank disburses this kind of loan either as an overdraft facility or Personal Loan at discounted interest rate. Terms and conditions offered are favorable for the borrower. In Banking sector, Overdraft facility is normally available for current accounts. Before you opt for either of two, it is critical to understand the pros and cons of both Overdraft facility and Personal Loan. The biggest advantage of  Loan Against Salary is that processing is very fast and without much hassle. Charges are minimal and rate of interest is lower compared to market rates. Let’s check both the types with salient features:

Overdraft Facility

The best example of overdraft facility is accounts opened under Pradhan Mantri Jan Dhan Yojana. These accounts have inbuilt overdraft facility of Rs 5000. In layman terms, you can withdraw Rs 5,000 over and above your account balance subject to certain conditions. The overdraft facility is basically a loan / credit extended for a short term to take care of the financial emergency. Overdraft facility can be extended with or without collateral / security / guarantee. It is decided by the bank based on risk assessment of a borrower. The borrower has to pay interest on the overdraft facility. It’s a misconception that interest is not applicable on Overdraft facility. In this case, there is no actual disbursement of amount / loan. The customer is allowed to withdraw approved amount from his / her account as per the requirement. It is not necessary to avail 100% overdraft amount, customer may opt for lower amount depending on his/her requirement. This is a major plus point of overdraft facility compared to Personal Loan. The biggest disadvantage is that amount approved is much lower compared to the personal loan. 

You can avail overdraft from your salary account only if your organization is in the approved list of the bank. The maximum amount allowed is 3 / 5 times of your monthly salary. Normally the salary considered is net take home salary which is credited in your salary account. For example, if your take home salary is Rs 50,000 then your eligibility for Loan Against Salary is Rs 1,50,000 but subject to certain conditions. These conditions are minimum and maximum overdraft amount as decided by the bank. Normally this range is from Rs 25,000 to Rs 1,00,000. Interest on overdraft is charged only on the amount utilized therefore it is beneficial compared to personal loan if you don’t know the exact loan requirement.

Depending on the risk assessment of a borrower, the bank may ask for some asset as collateral / security / guarantee. To be eligible for an overdraft facility, banks impose minimum salary criterion normally Rs 15,000 (Net Take Home Salary). There is no pre-payment penalty for the closure of overdraft facility. Minimum 3 salary credits are required to be eligible for the overdraft facility.

Banks charge nominal processing fees of between Rs 250 to Rs 500 for overdraft facility and repayment period is usually 12 months. This facility can be renewed provided your repayment history is good. If you leave your organization then you need to immediately close the overdraft facility by paying the amount utilized.

Personal Loan

For higher loan amount, personal loan against salary is best option. Banks can lend up to 10 lakh or 15 / 24 times the net take home salary, whichever is lower. Eligibility criterion is stringent for personal loan compared to an overdraft facility. The borrower should have completed min 3 / 5 years in the organization and min net monthly salary should be between Rs 20,000 to Rs 50,000 depending on location. The repayment period is between 2 years to 7 years.

Banks charge 1% to 2% as a processing fees which is on a higher side. For higher loan amount bank may demand collateral / security / guarantee. The interest rate is between 12% to 15%. Some banks also insist for loan insurance depending on the risk assessment of a borrower which further add to the cost.

Check-Off Facility

While availing Loan against salary, you will come across a term called check-off facility. Banks offer different loan eligibility criterion for a loan against salary with check-off facility and without / partial check-off facility. Loan against salary with check-off facility are more secure therefore bank may offer more favorable terms to the borrower including the lower interest rate.

The Check-off facility is the facility under which Employer of the borrower agrees to deduct the EMI from his/her salary. The EMI deducted from the salary of the employee will be directly remitted to the Bank (lender) by the employer. A tri-party agreement is signed between Bank, Employer and the Employee / Borrower with an undertaking from employer to deduct EMI from salary. An employer also guarantees that outstanding will be repaid if the employee will leave the job before the loan is closed. The outstanding amount of bank is deducted from the full and final settlement of the employee by the employer.

Last but not the least, any loan availed against salary is reported in CIBIL Database. In case of default on EMI / Repayment, your CIBIL Score will be impacted negatively.

To summarize, Loan against Salary is another form of an overdraft facility or Personal Loan. The only difference is that by availing Loan against Salary through your salary account/ employer/check-off facility may entail you favorable terms and conditions. It also includes lower interest rates compared to the market rate. The process is fast and hassle-free. You can expect loan disbursement in 2-3 working days. Loan against Salary should only be utilized under emergency situation. You should repay asap. EMI should not exceed 50% of monthly net take home salary. If you can manage your finances well then Loan against Salary can be very useful to manage financial emergencies.
Visit- www.cibilconsultants.com

Source-secondary

Significance of good credit score !

Now that we have talked enough about what is a credit score, why credit score is important and how credit score can help us. Now the main question is what should be a good credit score?

Starting from the beginning, a credit score is a three digit numerical figure which is derived from your data-rick credit report. It is a critical factor for lenders to determine your creditworthiness for a loan, credit card or any other credit.

Credit score ranges from 0 to 999 for all the bureaus. The major three credit bureaus in India are CIBIL, Equifax and Experian. The banks and financial provide the information to these bureaus and these bureaus based on the data provided by the banks and financial institutions provide the credit report to them. Basically credit score is a snapshot of the credit report of that individual.

Talking about a good credit score, a score more than 750 is considered to be a good credit score. Individual having a good credit score find it really easy to get approval for loans and credit card. While people with credit score less than 750 struggle to get approval for loans and credit cards instantly.

Below are some questions that are important to know about credit score:

How is credit scores generated?

Credit score are generated based on the factors such as payments histories, debt level, types of credit and length of credit accounts which are pulled out for their credit report. These factors will determine if the consumers will pay their dues on time or not. So, a credit score summarizes the information in your credit report, which makes it easier and faster for a lender to process a loan application and make a determination.

Benefits of good credit score? 

A good credit score will help you to take credit for a car or a home or get a credit card at a comparatively lower rate of interest. This means that you will have to pay less money towards interest.

Ultimately having a good credit score will only benefit you and having a poor credit score will only damage your credit profile.

Improve your credit profile by improving your credit score. Opt for service packages available at www.cibilconsultants.com

Source-secondary

Lenders Respect Financial Discipline !

An individual’s credit score provides a loan provider with an indication of the ‘probability of default’ of the individual based on their credit history. What this means in simple English is that the score tells a credit institution how likely the loan applicant is to repay a loan (should the credit institution choose to sanction your loan) based on the individual’s past pattern of credit usage and loan repayment behavior.

Given that the credit score is a loan evaluation tool developed to help loan providers, the first logical question that comes to mind is “what difference does it make to me?”

Well, the obvious answer is that the higher your credit score (i.e. the closer it is to 900) the more likely you are to get your loan application approved. The reason being, closer the score is to 900, the more confidence the loan provider will have in the individual’s ability to repay the loan.

While, this is what is claimed it is always useful to analyse the underlying data, which serves as the foundation based upon which such claims are built.

So what exactly does the data say?

The best way to analyse the impact the credit score has on an individual’s loan application is to observe the lending behaviour demonstrated by credit institutions over time. The table below shows us a comparison of new loans sanctioned by loan providers based on an individual’s credit score in 2008 as compared with those in 2011.

The data tells us that 90% of new loans sanctioned in both 2008 and 2011 were to individuals with a credit score of 700 or more. 

However, the data also indicates that over three years, lending institutions showed a change in preference from individuals with a credit score ranging from 750-799 in 2008 to individuals with a credit score of 800 and above in 2011.

Hence, you will have to maintain greater financial discipline in order to secure credit in the future.

It is important to note that loan providers also consider your total income, overall debt burden and fit with their internal credit policy before deciding upon your loan application.  Hence, if your EMI to income ratio is over the set cut-off percentage your loan application may get rejected despite having a credit score of 847.

Simply put, the Cibil TransUnion Score is like the marks one earns on school examinations. Higher marks (credit score) do increase the chances of your being accepted to college (getting a loan approval) but don’t guarantee your admission. A more overall evaluation of your extracurricular activities (income level, overall debt burden) is required before you admission is secured.

Similarly, different colleges will have different cut-offs with regards to the marks (credit score) required to gain admission (loan approval).

Renew, Revamp and Retain your credit score with packages available at www.cibilconsultants.com

Source: Secondary