Direct benefits of credit scoring

Credit scoring plays a crucial role in creating these credit opportunities, driving credit penetration and eventually percolation of benefits for the consumers.

Credit plays an important role in shaping the economic and social dynamics of the society. Remember the shrewd moneylender from old Hindi films, who charged enormous and never ending interest on capital, leading to deteriorating financial status for the borrower. Today, thanks to institutionalised credit, we have structured and regulated credit opportunities available for building assets, educating our children and aspiring for economic as well as social growth.

Credit scoring plays a crucial role in creating these credit opportunities, driving credit penetration and eventually percolation of benefits for the consumers.

The basic principle of institutional lending is trust. A lending institution provides credit to a borrower on a mutual understanding that the borrower will repay the sum, along with reasonable interest, through periodic instalments, over a decided period of time. The lender may not know the borrower personally, but will decide to grant credit on the basis of the borrower’s existing income and past repayment record provided by the credit bureau. The interest collected on these repayments serves as the capital for fresh lending to yet another deserving borrower who needs this money for his own growth aspirations. On the other hand, if the borrower defaults on the repayment of the loan, the credit grantor will face losses and will not be able to sustain capital for fresh lending for many more aspiring and deserving consumers.

This is where credit scoring steps in. Credit scores provide the credit grantor the ability to predict the “likelihood of repayment” by the borrower. Simply put, credit scores help the credit grantors to minimise risk of losses due to defaults and ensure profitability for fresh lending. Credit scores enable the lender to infer the risk profile of the borrower so that some “bad borrowers” (high credit risk) are not mistaken as “good borrowers” (low credit risk) and provided credit. This will result in a loss for the lending institution and in turn loss of the much needed credit opportunity for another creditworthy consumer. In simple terms, credit scoring enables lending institutions to create sustainable credit opportunities for deserving borrowers to allow them to build assets for financial growth.
           

But does credit scoring directly benefit consumers? It does.

Here’s how:

Speedier access to credit: When a consumer applies for credit, lenders use the credit score to make faster, more consistent decisions, thereby eliminating much of the risk of human error and subjectivity. Most leading lending institutions in India are already using the CIBIL TransUnion Score for making credit related decisions. Even significant lending decisions can now be made in a matter of hours or minutes rather than days or weeks with credit scoring. This enables faster processing of loan applications and thereby speedier access to credit for consumers.

Availability of affordable credit at better terms: In addition to both speed and convenience, credit scoring may also make credit cheaper, which means lower costs to consumers. Without objective credit scores, lenders may set prices in a subjective manner, resulting in credit products that are expensive for low-risk consumers and inexpensive for high-risk consumers. By reducing the costs of extending credit, credit scoring may enable lenders to give credit to more customers and at overall lower costs.

Credit scoring expands access to credit and drives sustainable credit penetration. It improves loan performance by reducing delinquency rates and containing NPAs. Credit penetration is achieved by significantly identifying ‘good borrowers’ (low credit risk) that otherwise would have been misidentified as ‘bad borrowers’ (high credit risks) and, therefore, would have been denied credit. At the same time, bad risks now have credit denied to them or are no longer subsidised by lower-risk individuals. In the aggregate, lending is increased, leading to greater economic growth, rising productivity and in turn greater financial inclusion.

Visit: www.cibilconsultants.com
Source: Secondary

Pointers On Things To Look Out For Before Applying for Car Loan

Car loans can be deceptive. It may seem like you’re easing the burden by paying in small chunks, but you could end up paying a lot more. We give you pointers on things to look out for before applying.

Buying a car on a finance scheme gives buyers the liberty of not having to invest a large chunk of their savings in a single investment. What’s more, finance schemes are available on almost every car on sale here. 

Finance companies offer loans of up to 90% of the car’s value, or in some cases, even the entire amount, depending on the repayment scheme and the model of the car. Our advice would be to pay as much as possible in terms of downpayment, so that the amount you return over the years (with interest) is minimised. A downpayment is the initial payment made when the car is financed, whereas the remaining amount is paid in small chunks, called instalments, over a period of time.

A car loan is, however, a double-edged sword. For starters, while it does allow you the flexibility of paying the overall amount over a certain period of time, one must keep in mind that you will have to pay back much more to the bank. As an example, on a loan of R6 lakh at an 11% rate of interest, you will have to pay back approximately R36,000 for every lakh borrowed over a three-year scheme or R60,000 over a five-year scheme.

It’s also worth noting that some loans will be offered on the ex-showroom price of the car. It’s easier on your pocket if you negotiated with the bank and got the loan based on the on-road price, as the loan will cover registration charges, insurance, road tax, and a few other costs. Also, some banks may have a really large processing fee, but if your credit history is clean, it’s very likely that you’ll get a waiver on your processing fees.

Listed below are the various parameters you should be aware of before applying for a car loan.

Eligibility & credit history

Banks set some criteria that need to be fulfilled by the loan applicant before a loan is granted. The bank verifies your income statements for a certain duration before deciding on the loan amount they deem fit to fund. They also go through CIBIL (Credit Information Bureau India Limited), which maintains records of your loans and credit card transactions that are submitted to the bureau every month by banks and credit card companies. Based on these records, they generate a CIR (Credit Information Report) via which a credit score is generated. 

Generally, a credit score of more than 700 is considered good, and makes a strong case for getting the car loan sanctioned.

Rate of interest

One of the most important factors to consider before applying for a car loan from a particular bank is the rate of interest, as it can decide your instalment amount and the total amount you will be paying above your borrowed sum at the end of the loan tenure. Interest rate charges differ according to the duration of the loan and the type of interest scheme chosen. This can be classified into two types—fixed and floating. Fixed interest rates remain constant during the tenure of the loan, whereas a floating interest rate changes according to the trends in the market. To play it safe, opt for a fixed interest rate loan.

Public sector banks generally offer lower rates of interest to the tune of 10.1-12%, with loan tenures of seven years maximum. On the other hand, private banks offer loans at a higher rate of interest of around 12.5-15%, with the advantage of having less documentation required and better service quality. Most of the loans offered nowadays are of the reducing balance type. In this scheme, as you pay the EMIs, your principal amount decreases and interest is levied on the remaining reduced amount and not the entire principal sum.

It’s also worth noting that having a long-standing relationship with a particular bank can get you good offers. Car loans are also customised according to car models; popular ones generally get the best loan offers as compared to slow selling models. Get all the options on the table before selecting the right one that meets your requirements and expectations.

Package deals

A convenient option is to take a car loan from the purchased car’s dealer as they have bank representatives or tie-ups with banks to offer lucrative deals as part of a package that includes loans, insurance waivers/discounts and car accessories. Dealers earn a commission on the items they sell, but sometimes, a little higher interest rate or insurance package maybe negated by the accessories offered free with the car. It’s better to evaluate the options from the dealer’s side, as well as directly from the bank or insurance company to ascertain the best deal before taking the plunge.

Avoid penalties

An important factor to consider when choosing a bank loan is foreclosure, which, simply put, is the closing of a loan earlier than agreed by paying off the remaining debt. On a recent ruling by the Reserve Bank of India, a verdict was passed wherein prepayment (making a payment that’s more than your regular EMI, hence reducing the principal amount that has to be paid back) penalties for loans that have been purchased on a floating rate of interest will be waived. If a foreclosure of the loan is on the cards, be prepared for high foreclosure. A penalty for the same is waived if the next loan is purchased from the same bank after the closure of the earlier one. Some banks also do not allow you to foreclose before a certain period.

Other charges

Bank loans come with other charges like processing fees and late payment fees. Some banks charge a flat processing fee while others charge a percentage of your loan amount as processing fees. A late payment charge, generally to the tune of 2%, is also levied on the EMIs. These charges, although minor in number, should be evaluated as part of the decision making process. As an example, on an EMI of R10,000, and with a 2% penalty fee charged, your overall EMI for that particular month would be R10,200.

It’s clear that there’s a fair amount you should be aware of before considering a car loan. Different banks offer varying loan rates in an attempt to lure customers, so it’s important to consider these aspects before zeroing in on a finance scheme.

It’s important to remember that CIBIL maintains records of your credit history, based on which a credit score is generated. This will determine how credit-worthy you are, and the better the score, the better your chances are of getting a loan amount required by you approved.

What’s more, a long-standing relationship with a bank can also go a long way in helping you get a finance scheme that suits your needs the best, with little documentation required.

Source: Secondary

Monitor credit report and avoid identity theft !

As we all know that having a bad credit can make you struggle to get approvals for loans, credit cards and for any type of credit. It can result into unfavourable interest rate that can cost you thousands of rupees when you take any kind of credit.

But did you know that even identity theft can damage your credit?

Identity theft occurs when someone tries to apply for any kind of services in the name of some other person. Identity theft is one of the major crimes in the world. It can damage your reputation as well as your credit profile. Also it can lead to a criminal record in your name an arrest, having your driver's license revoked or your wages garnished. Also you can lose your employment and the place you live.
How can you avoid identity theft?

Your credit report has all the information regarding the all the credits that you have taken in your entire life cycle. It contains also contains the number of enquires that have been made by you over a certain period of time.

Constantly monitoring your credit report will help you to check if there are some enquires that have been made by any other person in your name. If you detect some incidents, it can turn into identity theft.

Even, there can be some accounts which are not applied by you, but are reflecting in your credit report as open. This can drastically lower your credit score and your creditworthiness.

Steps you should take?

One you figure out accounts that are not applied but you, you should take some necessary steps that will help you to eradicate the errors in your report and will make your report error free.

Firstly, you should inform the bank regarding the account wrongly updated in your name. Provide all the necessary proof required by them.

Secondly, you should also inform the bureau regarding the same mistake made by the bank and ask the bank as well as the bureau to kindly update the same in their record.

Thirdly you should get a copy of the credit report and check if the same have been rectified.

Source: Secondary

Information your Cibil report contains !

In India, very few people know about CIBIL. CIBIL maintains all the data regarding any credit taken by any individual in his entire life cycle. It provides a report known as credit report which contains all the detail regarding all the accounts taken by the individual. This report is very important because it shows our past, future and present of credit history.

All banks refer to credit score of every loan applicant as part of due diligence process. It is an important step in loan due diligence process as it gives a fair idea of the credit-worthiness of every individual. In very simple terms - CIBIL Score determines the probability of a default of a customer. A high CIBIL credit score demonstrates financial discipline and a lower likelihood of default.

Credit Information Report (CIR) contains the basic information about your credit history and any other financial related information that is available from CIBIL.

Personal information: Your name and details of ID proofs are shown here. Your PAN, Passport, Drivers License, Voter ID etc. appear in this section.

Contact information: Your recent address, phone number and email address given by you to the banks and lenders will be shown here. The address category tells whether it is permanent or temporary and official or residential.

Employment information: This section shows your occupation and income. The most recent information as provided by the lender for a particular credit account will be shown here.

Account information: This is the most important section of the report, which shows the details of your existing loans and other credit facilities. Along with this, the details such as name of the lender, types of credit facility, account number, account type and type of the ownership will be given here.

Get your credit report easily by visiting www.cibilconsultants.com

Source: Secondary

Make your business creditworthy !

Is your business credit worthy is one of the main things asked when you apply for a loan or credit card. Here are some ways to make your business credit worthy-

Make yourself personally creditworthy:
Your personal credit score pays a big role in building your business creditworthiness. If it is low, you should focus on repairing it. Pay off all your dues on time i.e. any past amounts which are due and/or also those in process of collection. Pay down any revolving balances on your credit cards and in future try to avoid carrying such debts. If that is not possible for you, then make sure you pay more than the minimum amount which is due and also make these payments on time.

Establish a separate business identity:
As and when your business starts getting settled and well established and you are looking for specific credit score for your business, then set up a separate business entity from your personal affairs. Get advice from your legal advisor or attorney on which would be the best possible legal structure for your business. Register for a federal tax ID or an EIN (employee identification no) in your state. Then lastly, establish a business banking relationship to segregate your business from your personal finances.

Establish separate credit record for business:
After you've set up a separate business identity for your business and been there for a while, you would like a separate credit record different from your personal credit record, for your business too and for this you need to apply for a separate credit card for your business.

Keep up with your business credit reports:
Most businessmen say they don’t get time to check their business credit reports when in reality they are just afraid to check them. You should not be afraid because the faster you would check the reports, the sooner you’ll be able repair them or fix any discrepancies you find. The credit reports should be checked at least annually to make sure there are no mistakes; if you have a frequently changing business situation then check them quarterly. Get your most recent credit report when applying for a loan.

Keep checking up with the credit rating:
Keep checking up with the credit rating about your reports. If you find any inaccuracies or error in your business credit reports, report to the credit bureau directly and challenge them.These bureau are supposed to contact the lenders with the incorrect information; the creditor would then, either contact the credit bureau and correct the information or would respond to you, explaining their reasons on why they do not agree with you on issue of the disputed payment.

When you settle this issue, your credit score is most likely to go up. However, keep checking it till it does.
Now that your credit score has improved it would also improve your credit worthiness. This credit line can be a safety net for your business, as it makes sure that you have required cash for your day to day business activities and for handling an emergency.

For any assistance regarding credit scores and report book an appointment now only at www.cibilconsultants.com

Source: Secondary