Low Value Loan and CIBIL Score

Loan in any form is not good for financial health of an individual specially low value loan. Don’t believe in Good Loan or Bad Loan, it should be avoided (If possible). Rather believe in credit discipline and good credit practices to improve CIBIL score. For an asset like property, an individual cannot be save such a huge amount to buy property without home loan. Barring few exceptions i.e. high value assets, we can manage our finances to avoid low value loan/ borrowing. A Loan should be availed if following 2 conditions are fulfilled:

(a) Purchase / Buy should be an Asset: An Asset is basically a belonging which should be appreciating in nature and adds value to the wealth of an individual. By this definition, Property is an asset whereas loans like vehicle loan, personal loan for foreign holidays, consumer loan for white goods etc are not assets. Any kind of consumer or personal loan for non assets is not advisable. Lets take example of a car, If one bought a car of 5 lakh through Car Loan then it doesn’t make sense. Considering Interest rate of 14%, cost of car along with interest will be approx 6 lakh plus. As car is a depreciating asset and there is a famous saying in North India that value of car is half as soon as it comes out of showroom. Therefore it doesn’t make sense to avail vehicle loan for depreciating asset like Car, Bike etc.

(b) Value of Purchase: Any low value loan shows credit hungry behavior of a buyer which is true for vehicle / consumer / personal loan.  Though mortgage of car / bike is secured loan but point is to make is low value loan. Low value loan impacts CIBIL score negatively. You should avail loan only for high value purchase like Property. Though people avail personal loan for foreign holidays which is also High value purchase but its not an asset there, same is not suggested.

Low value loan has no correlation with the income level of an individual. As example, man who earns Rs 2 lakh per month but his savings are actually NIL whereas someone with a salary of 1 lakh can save Rs 30,000 per month easily.  Its a wrong notion that with high income, if you avail low value loan then it will not impact your CIBIL Score. Infact its other way round, if one's income reported in CIBIL database is Rs 1,50,000 per month and he avail low value loan of Rs 50,000. At micro level, Its show how pathetic he is in managing his finances and poor state of my savings level.

On the other hand, an individual with salary of Rs 30,000 per month availing low value loan of Rs 50,000 can be justified but it has its own problem. The repayment capacity of person with low income is low therefore probability of default is very high. Low income group lives under hand to mouth situation. Any unexpected expenditure disturbs the monthly budget and Axe falls on EMI of low value loan. In short, its a double edged sword. Any wrong move may permanently close the doors of availing future credit from financial institutions.

As we observed that in both the cases i.e. high income and low income, low value loan impacts CIBIL score negatively. In few cases, it is observed that people opt for low value loan just to avail some scheme at the time of purchase. In one of the case,  Ms. X bought washing machine through consumer loan. She is well off but retailer was offering free mixer grinder if purchase was through consumer loan. We should avoid such temptations and strictly follow financial & credit discipline. Any such adventure can impact our CIBIL score.

How to Avoid Low Value Loan?

This post is not conveying that we should not buy vehicle, white goods like washing machine or should not plan foreign holiday etc. We should plan all such purchases but there is a small change in the plan. Mode of payment should shift from Postpaid to Prepaid.  In short, instead of availing low value loan for such purchases, we should save for these low value purchases in advance so that it will not impact our CIBIL negatively. Recurring Deposit is one such blessing in disguise which can help us in short term savings to plan low value purchase. Only catch is that we have to plan in advance. Suppose, one person is planning to buy a new refrigerator or Bike during this year at the time of Diwali. Instead of availing low value loan at that time,he can plan now as he have some time to save. He checked and found that on-road price of a bike is Rs 38000 therefore he set a target of Rs 42,000 in 9 months to adjust any price change. He will open recurring deposit of Rs 4,500 per month for next 9 months at 8.25% interest rate. On maturity, He will receive Rs 41, 908 thus will avoid low value loan at the time of purchase. This approach will have triple advantage:

(i) It will not impact his CIBIL Score

(ii) He will not bear the interest cost which is another savings for him i.e. icing on the cake.

(iii) Last but not the least, he avoided low value loan through intelligent savings

You can check return from Recurring Deposit through Recurring Deposit Calculator.

To summarize, borrowers should avoid low value loan as it may impact CIBIL score negatively. It shows credit hungry behaviour and financial un-stability. Loan should be availed only for big ticket purchase which classify as an asset and add long term value to the financial portfolio of the borrower.
Visit- www.cibilconsultants.com

Source-secondary

Cost of living and your credit

You know that where you live matters when it comes to your disposable income. Cost of living makes a big difference in your budget. But can it also impact your credit? You might be surprised at how your cost of living might also matter when it comes to your credit. When you have a high cost of living, your income might not keep up with your expenses, and for many people that means debt. If your debt becomes unmanageable, that can, in turn, affect your credit.

Borrowing to make ends meet

Living in an area with a high cost of living means that you might have to compromise, looking for ways to reduce your expenses so that you don’t exceed your income. If you live where things are cheap, you may not have to compromise.Where you live changes the way you approach your finances. Your situation changes either how you compromise on your wants and desires or your credit score. You choose how it’s going to go.

Applying for credit

The process of applying for credit is the same, no matter where you live. However, the cost of living in your area can impact the type of loans you qualify for, and the rates you receive. If your income doesn’t quite provide you with enough leeway when it comes to your cost of living, some lenders might disqualify you based on your income. You might be forced to apply for credit at lenders willing to take on more risk, but you will need to pay a higher interest rate. 

Additionally, if you have been borrowing to make ends meet, and you’ve already racked up debts that are impacting your credit score, it can make it harder to get approved. Where you live cannot so much change the way you apply for credit, but your need for it may vary if costs are higher.

In areas with a high cost of living, you might also have to limit what types of loans you choose to take on. High-cost areas tend to have very expensive homes. Buying might not make sense in these areas due to prohibitive costs. We discovered that it would cost you three to four times as much to buy a home comparable to what we you before. On the other hand, the rent on an apartment with slightly less square footage (250 square feet) than your old home is “only” about twice your mortgage . Your decision to avoid mortgage debt while you live in a higher cost area will also likely eventually impact your credit, since part of a credit score is based on the types of credit you have — and a mortgage counts for a lot, especially if you pay it on time each month.

You might also decide to avoid buying a car in an area with a high cost of living. I know several consumers living in major metropolitan areas that don’t bother with cars. Car loans are expensive, and cars come with maintenance and repair costs, as well as insurance costs. Taking public transportation costs less than owning a car in many major cities with high living costs. 

Choices you make about what types of credit you apply for can help you avoid getting in over your head with debt and ruining your credit in the long-term.

Manage your cost of living for the benefit of your credit 

Even if you live in an expensive place, you can find less expensive options or alternatives within that place. Some of the suggestions for reducing your cost of living in an expensive area include:

• Buy a certified used car rather than a new car
• Buy items off-season
• Use coupons
• Shop sales
• Buy used and at thrift shops
• Share living quarters when applicable

Managing your cost of living can help you avoid the need for debt to finance your lifestyle. If you can’t or won’t move to an area with a lower cost of living, you’ll have to make adjustments to your spending to avoid getting into a situation where your cost of living destroys your good credit. Generally speaking, do not finance things for daily living.You must plan ahead and be a smart consumer.

Source Secondary

Bad credit score can harm your chances of car loan approval !

It is wrong to think that with a bad credit you won’t ever be able to buy a car, but this also doesn’t mean that you think you’ll get a car loan as per your own terms and within your monthly budget. Getting a car loan with bad credit is not impossible; it is possible but not always on your terms. You’ll have to compromise on some of the terms of the loan. It also depends on how bad your credit is, like if it borderline some lenders might still see you as a prospect and would be willing to take the risk.

Checking your credit report: 

It is not uncommon to have errors in your credit reports. So it is better to check your reports beforehand to see if there are any errors which may have reduced your score. If there are any errors, correct them before you apply for a loan. This can save you time as well as money.

Improve your credit score:

Some people are on the borderline of good credit and bad credit. In such situations it is better to wait and improve your score before applying for a loan.

Have realistic expectations:

You have to realize that though you’ll be able to get a loan, you are likely to pay more due to higher interest rates than a person with a higher credit rating. Accept your situation and aim for cars which are not out of your financial situation. Also, accept that since you have a bad credit, you are obviously going to miss on some attractive loan offers so it is advisable to go for less expensive cars which are in your budget and wouldn't lessen your chances of getting a loan.

Payments paid off:

Having unpaid payments is always a bad idea before applying for a loan. Even though the lender is willing to give you a loan despite your bad credit, the unpaid payments won’t go well with him. So, pay off almost all in the months preceding your loan application. Your payments records should be clean at least for 6 months before you apply for a loan.

Check your options:

Since, you are not so well with your credit, you are obviously going to get loans with higher rates but accepting and settling with the dealer financing your loan without looking at options may prove to be harmful. Yes, the dealer does want to sell his car but he may also be looking for profit in the financing you are likely to get a higher rate with the dealer. Check out with financial institutions, credit unions, your bank and the loans they offer. Compare their interest rates and other terms and choose which would suit you the best. It is better to secure your finance in advance, before you go to the showroom for car.

Get a CAR (Cibil Analysis Report) from www.cibilconsultants.com and then own a car !

Source: Secondary

How can small mistakes hurt your credit score ?

Humans can make mistakes and they can be big or small. In credit sphere making small mistakes can also impact your credit score harshly.Credit scoring algorithms do not understand human nature. Let us understand the concept with an example.

Rahul Sharma, had recently bought a three-bedroom apartment in an upcoming locality close to his office. He had a car and was contemplating a big car after getting his annual raise, which came along sooner than expected.

Rahul's Cibil score was around 750 points on a scale of 900 the last time he had checked while buying his first car a couple of years ago. When he decided to apply for a loan to buy a Luxury Sedan, he was in for a huge shock. The bank informed him that his application was rejected because of a low Cibil score and a couple of negative remarks in his credit report. He pulled out his personalized Cibil score and found his score to be around 610.

Rahul had delayed a couple of his car loan EMIs and a couple of his credit card payments. Delayed or missed payments get reported on your credit report by the lenders and have a negative impact of pulling down your Cibil score.

Lenders often prefer a healthy credit score from their prospective borrowers. Here is a table to give you an idea of percentage of new loans sanctioned to people with different credit scores:

Credit score	Percentage of all new loans sanctioned in this Cibil score band
<650	4.7%
650-699	5.2%
700-749	9.7%
750-599	22.8%
>=800	57.6%

Source (cibil.com)

From the above table it is very clear that people with higher Cibil score stand a higher chance to get a loan. Also, it is important to understand that as risk-based lending is kicking into the Indian market, people with higher credit score also stand a chance to get loans at a lower rate of interest.

So, after Rahul studied his personalized credit report from Cibil, he realized his mistake. He had forgotten to deposit cash into the account from where his car loan EMI used to pass. This happened a couple of times and also delayed 3-4 credit card payments. The credit card company had mentioned days past due (DPD) against his account.It slashed his credit score.

It is very difficult to assess how much of a drop in credit score you could expect because of a single missed payment.  One could expect a drop of 50 to 100 points.
Credit score can even be repaired. You need to follow a financially disciplined life.

For ascertaining your score or acquiring credit repairing services contact us at www.cibilconsultants.com 

source-secondary

Surprising Tactics Rich People Use To Grow Their Money

Let’s be honest, most of us daydream about what we would do if we were rich. We imagine doing stuff like quitting our jobs, buying a boat, and spending the rest of our lives sailing around the world. It brings a certain satisfaction dreaming about such things, but is this really how rich people spend their time?

I highly recommend you check it out if you are at all interested in someday becoming wealthy. You might be surprised to learn that most self-made millionaires are extremely frugal. In fact, out of all the millionaires they profiled, the most wealthy drove the oldest cars and had smaller homes compared to their peers.

Here are some of the most surprising tactics used by millionaires to manage (and grow) their money.

Spend Time Researching Investment Opportunities

On average, millionaires spend almost 20% of their income on investments. More importantly, these people spent time activity researching their investments. In other words, investing isn’t viewed as simply a retirement plan, but rather, one of the most important drivers of their wealth and future security.

Keep a Budget

Surprisingly, most millionaires have a budget and consider it important to stick to it. In other words, they have a plan. And in the end, this really does make a huge difference. How many people do you know who actually keep a budget?

Don’t Buy Luxury Cars

Fact is over 80% of luxury cars are purchased by non-millionaires –that is, people trying to create the illusion of wealth.

its really surprising !!