Credit and Cost of Living.

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

Do you live an area that requires you to borrow to make ends meet? If you are borrowing to make ends meet, that can eventually affect your credit. It’s going to depend on the cost structure of things, in terms of where you live, and your wants and desires.

If you live in a high rent district, it’s going to be far more difficult to buy a home or keep up with the expenses, if you’re on a fixed income. It’s easy to spend a large portion of your income just on day-to-day living expenses like housing costs, utilities, and transportation. 

In some cases, regular living expenses can be high enough that borrowing is part of how consumers make ends meet. You might think that you are just borrowing a little bit for now, but the reality is that if you can’t make ends meet this month, it’s going to be even harder next month when you have a debt payment as well as your regular expenses. Pretty soon, you find that you are just paying the minimum payments on your credit cards since it’s more affordable than paying off the balance — or even half the balance.

Over time, your balances rise. This impacts the credit utilization portion of your credit score, bringing your score lower. At some point, though, your balances and your minimum payments will reach a point at which you can no longer make the payments with ease, and you might start paying late, or even missing payments altogether. Since payment history is the biggest factor in determining your credit score, once you get to the point where you can no longer afford your debt payments on top of your living expenses, the damage to your score can be surprisingly swift.

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. If you can’t truly afford to make home payments, risking your future credit to a foreclosure might not make sense. 

You might also decide to avoid buying a car in an area with a high cost of living. 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

Excellent Credit Means?

One of the realities of finances is that many lenders and other financial product and service providers want to know your credit score. Your credit score is essentially a summary of how you handle your money. The higher the score, the better deal you will receive, whether it’s a lower interest rate on a loan or a better quote on your car insurance.

Excellent credit can mean saving tens of lakhs of rupees over your lifetime. In some cases, especially with mortgages, you could potentially save more over the course of 30 years.

What Results in an Excellent Credit Score?

                          

Many consumers don’t think it’s fair that the credit score has become a stand-in for financial responsibility. The argument is that truly good financial habits don’t require you to borrow. For the most part, a credit score only measures how well you have handled your loan obligations. If you don’t borrow, you don’t end up with a credit score. So, unfortunately for some, the first step to building an excellent credit score is to apply for — and obtain — credit, usually in the form of loans.

Once you have loans, your next step is to make all of your payments on time and in full. You don’t need a ton of loans to build up to excellent credit, though. Usually, it’s sufficient to get an installment loan (make the same payment each month to pay off the loan within a set period of time) and a revolving loan (like a credit card). If you are careful to borrow a small amount and make regular payments, you will start building your credit history. It’s important to be careful to incorporate any credit spending into your regular financial plan so that you don’t get in over your head with debt.

There are different credit scoring models, but most have ranges between 350 and 850, or something similar. In many credit scoring models, you need a score of at least 720 to 740 to be thought to have excellent credit. When you have excellent credit, you usually qualify for all the best rates. And, as long as you have enough income to afford your payments, you shouldn’t have trouble qualifying for just about any loan.

If you want to get good deals, from qualifying for a good apartment without paying a large security deposit, to getting the lowest mortgage rate, cultivating excellent credit is a necessity. 
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Source: Secondary

Divorce can affect your credit score!

In many marriages, one spouse pays little to no attention to the household finances. But if the marriage is coming to an end, both spouses need to be concerned because divorce can have a substantial impact on both of their credit ratings.

The act of divorce itself doesn’t impact your credit. But divorce is rife with financial issues, and the division of assets and debts can have a huge impact on the credit history of both you and your spouse.

Perhaps the main impact of divorce on credit involves joint accounts. A divorce decree will spell out who is responsible for which accounts, but it will not actually remove one spouse or the other as an account holder. Thus, it is still up to you or your former spouse to remove the name of the person who is no longer responsible. The person who is no longer responsible for the account should ensure that his or her name is removed, particularly from any jointly held debts, so that he or she will not be liable in the event the other spouse fails to make the required payments. Failure to ensure the removal of your name from such accounts can negatively impact your credit for a long time, even if your spouse’s actions occur years after the divorce is settled.
                               

Your liability for debts incurred during your marriage may depend on the law in the state where you reside. In community property states, such as California, the law presumes that you and your spouse are entitled to half of what the other earned during the marriage, and are responsible for half of the debts incurred. However, in equitable distribution states, the law requires that assets and liabilities be distributed equitably and fairly between both spouses.

During divorce proceedings, while your name is still attached to jointly held debts, you should ensure that timely minimum payments are made toward each debt, in order to protect your credit history. Even if your spouse has historically made those payments during your marriage, he or she may not continue to do so during the divorce. If the divorce decree provides that your former spouse is required to make payments on accounts held in your name, you should monitor the activity on the account closely to ensure that the payments are made, since the lender will still hold you responsible and it will be your credit that is impacted by any failure to make timely payments.

Another area that is significantly impacted by divorce is each spouse’s income. What is affordable when two spouses’ incomes are pooled is often not affordable when the same amount of income must support two separate households. This may be particularly true when children are involved and one spouse keeps the family residence, with the same mortgage amount and living expenses, while the other spouse must acquire and maintain a new, separate residence. You will need to ensure that you can manage to pay all necessary expenses subsequent to the divorce, or you may find yourself falling behind on payments and that will negatively affect your credit.

Your good credit may be extra important in the event of a divorce, since it will be the sole basis on which lenders will decide whether to grant you a car loan or mortgage. Prospective landlords may consider your credit history in determining whether to lease you a new home. Therefore, it is extremely important that you do what you can to protect your credit during your divorce.

Source: Secondary

Make the optimum utilisation of your credit card

Credit cards can be a convenient way to acquire life’s necessities and luxuries. But it comes at a price in the form of interest rates which, when compounded over a long period, can add up to a huge sum of money. If planned well and implemented with discipline, you can actually enjoy the benefits of credit cards otherwise they can also become financial nightmare when used inadequately. Let us go through some best ways of using a credit card:

Monitor your spending habits

Here, you get credit while you go spending or paying bills. You can use the credit limit to purchase anything you desire. But consumers often tend to over limit while using credit cards; it also puts you under pressure as a portion of your monthly income is truncated towards paying the EMI. So, keep a check on your credit card spending and avoid debt trap.

Don’t keep many cards

The more credit cards you have, the more you may be tempted to spend and the more difficult it will become to keep a track of how much you have spent and when the repayments are due. Ideally, they should be used as a temporary substitute for carrying cash. And, if that is the only motive you have when you carry a credit card, you will find that having one or at most two is quite sufficient.

Immense usage

Make the best use of credit cards while making every possible purchase even regular items with it like online purchases, bills, groceries etc. This will lead you keep a budget of your day-to-day expenses while maintaining a record. In this way you can earn maximum credit points as well.

Say ‘No’ to borrowings on cards

Just remember that credit cards are easiest way to acquire what you needed at given time but it can lead you in trouble also at the same time. They are not an additional source of money. If you get shortage of money, it’s better to avail a personal loan rather indulging in cash withdrawals through credit card. As the interest rate on personal loan is less in comparison to revolving credit on credit cards facility.

Terms and conditions

Be it a credit card, the devil is always in the details. The small print, i.e. carefully worded clauses, sets the terms and conditions of your loan, including the schedule of EMIs, the interest rate calculation method, charges and penalties in case you deviate from your repayment schedule. Unfortunately, many borrowers don’t spend much time on it and this leads to troubles later on. It’s better to read it seriously and understand it well.

Avoid paying card surcharge

It’s an important policy that merchants are not permitted to demand surcharge on customer purchases. So, neglect paying a card surcharge.

Reward points and cash backs

Whenever possible try to make the use of reward points and cash back. But do remember that you take them as an additional bonus and do not get tempted with them.

Examine your credit limit

It’s wise to have always maximum credit limit as to shed the situation of uncertainty. It’s prudent to implement self-discipline on available credit limit on your card. And try to avoid offers to increase the credit limit on your card.
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Source: Secondary

Enhance your home loan eligibility

If you are looking for the right home loan to buy your dream house, keep in mind, loan eligibility concludes whether your loan application will be approved or not and if approved, the amount of loan that is likely to be sanctioned. It is constituted on your credit worthiness, which rely on income and debt repayment capacity. Although a good credit history and a stable income level are the primary sources of your home loan eligibility. You can boost your loan eligibility by following these simple steps:

Combining Incomes: 

As income is a primary norm, you could consider making a joint application while combining the incomes of other family members which will have a positive impact on your repayment capacity. Any other earning family member including spouse, sibling or parent can become a co-applicant for the loan. In such cases, as the clubbed income level would be higher, the loan eligibility would also be higher.

Repaying other outstanding loans:

If you have other outstanding loan liabilities, affects the loan eligibility drastically as the EMIs being paid towards those loans are deducted from the monthly repayment capacity. Lenders can easily find out your existing debt level. As per to enhance your eligibility, it is advisable to reduce your other outstanding loan before applying for a home loan.

Go for step up loan:

Step-up loan take into account the increase in incomes of individual over the period of loan repayment. This type of a home loan has lower EMI in the beginning which is increased in a step wise manner with the borrower’s income over time. In this case, the loan eligibility is calculated on the basis of the possibility of higher income that the current earnings which can increase the amount substantially.

Mutual relationship:

If you enjoy a long-standing relationship with the lender and have a good credit history, you could easily negotiate for a lower interest rate and higher loan eligibility. 

Long tenure:

The eligibility is determined based upon repayment capacity of the applicant on a monthly basis. If you increase the tenure the EMI of loan reduces and hence the applicant can now borrow much amount with the same monthly repayment capacity. However, it will increase the rate of interest levied on a longer duration.

When you attempt to improve the total amount that you are eligible for taking a home loan, it has to be based on actual repayment capacity. While you avail loans, ensure to repay your dues on time as to ignore the debt trap.

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Source-secondary

Beware First-time home buyers!

Buying your dream home is a massive investment of one’s lifetime and requires tremendous research about the property, the builder, the policies etc. Taking a home loan is a long term commitment; it becomes crucial that the buyer doesn’t get carried away by lucrative deals and offers. You may end up paying more or getting inefficient service if you choose the wrong scheme or lender for your home loan. There are many mistakes committed by first-time home loan borrowers, which can prove to be destructive for their finances.

Here are the top 5 mistakes committed while taking a home loan:

Avoid selecting your lender first

Most people prefer to go to banks calculate their eligibility as per to know whether their finances will be adequate or not for a loan. Mostly, they are deceived, since the lenders may offer some thriving deals to make money. It’s beneficial to check your eligibility factor online and know easily how much approximate amount of loan you are eligible for.

Borrowing beyond means

Obtaining money more than their income source allows is another misstep which most people make. Banks grant the loan on the basis of your eligibility, income and liabilities, but they don’t scrutinize your existing expenses. However, if your current expenses are immense, despite of that, if you take a loan which results in high EMI payment, you may end up in a bad debt trap. It is always better to lower your budget if your current income and expenses levels are not favourable.

Opting a false loan scheme

In the current economy times, banks are initiating different overwhelming schemes for home loans. Remember, there are some loan schemes in which the rate of interest remains fixed for the initial years and thereafter the loan becomes a floating one, which is linked to the bank’s base rate or prime lending rate. People choosing such schemes should be careful to understand if they have the scope to keep the EMI or tenure changes that will be unveiled when the floating rates kick in, which can be considerably higher! A lack of understanding over a loan scheme or a lack of repaying capacity when higher interest rate kicks in can only result in difficulty in servicing the loan!

Ignoring to review cost

It is always advisable to bargain regarding the interest rates, EMIs, etc. Since, apart from your income and payment structure potential, your negotiation skills will also be considered. And as a prudent loaner, get all the information about the processing fees, legal charges and other hidden costs before deciding on the loan amount.

Neglecting insurance for your home loan

Most borrowers do not recognize this risk, in case, any demise happens to you unfortunately during the tenure of the loan. The home loan that you have taken should not be a burden on your family. By insuring your home loan with a life insurance and a critical illness policy you can benefit your family members with a home and not a home loan. In case of the death of the borrower, the life insurance cover can provide the family with a monetary cover. And for the critical illness policy, if in case the borrower is not able to earn due to any critical illness, this policy will provide financial assistance wherein the interest amounts can be paid.

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Source-secondary

Joining a co-applicant in a home loan!

Are you aiming to avail a home loan? Will you like to relish substantial profits from it? Here’s your answer – joining hands for a bigger home loan. You can instantly apply for joint home loan by simply adding a co-applicant or co-borrower in your application of home loan. Let’s explore some terms about these loans which banks specify when co-applicants are added.

Loan eligibility

All banks allow two or more persons to jointly apply for a home loan. By applying along with a co-applicant, your eligibility increases and as a result, you can avail a higher loan amount. However, banks specify that only people with certain specified relationships like father and son, husband and wife, brothers are permitted to apply as co-applicants. Beyond these, other relationships are not permitted as co-applicants. Moreover, the co-applicant needs to have a regular source of income.

Between a co-owner and co-applicant

Co-applicant is a person who applies along with the borrower for a loan. A co-borrower along with the primary borrower accepts responsibility for repaying a debt. Infact, from a bank perspective, co-owners of a property should necessarily be co-applicants.

Husband and wife

One can include one’s spouse as a co-applicant for a home loan. His or her income will be added for determining the loan eligibility. The maximum tenure of the loan is determined based on the retirement age of the older partner. As per bank aspects, this is an ideal situation to have the husband/wife as co-applicant.

Father and son

The terms relevant to a father and son being co-applicants are thoroughly clear, if the applicant is the only son, he can jointly apply with his father with both the incomes being considered. The property should be in their names jointly and it does not matter who the main owner is. This is because in any case the son is the legal heir of the father’s property.

In case a person has two or more sons and if he wants to apply jointly with one of them, he should not be the main owner of the property. This is because, on his death, his children should inherit the property jointly and may cause an inheritance dispute. The father may only be taken as co-applicant and his income may be considered for the loan. He may be a co-owner or not own the property at all.

Unmarried daughter and father

An unmarried daughter can apply jointly with her father. However, the property should only be in the name of the daughter and the income of the father should not be considered. This is to avoid any legal complications on the subsequent marriage of the applicant.

Brothers and sisters

An applicant may apply with his brother provided they are currently staying together, and intend to do so in the new property as well. However, a brother cannot apply with his sister. Also, an applicant cannot have her sister as a co-applicant.

Documents

The documents needed for joint home loans are the same as any other home loan. The only difference is that here documents are needed from both applicant and co-applicant. General home loan documents needed are identity proof, address proof, salary slips and bank statements.

Taxation benefits

We all use home loans to save tax. Joint home loan tax benefits are an extension to the tax exemptions provided by home loans. In the case of joint home loans, applicant as well as co-applicant can enjoy tax benefit for the contributions towards the loan.

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Source-secondary

Down payment for buying an affordable house

The major step in a person’s life is to buy a home. It is often considered to be a significant achievement, a good investment and a celebratory occasion. However, the experience can take a negative turn if the transaction is not handled efficiently, and one of the most important factors that could affect the process is the amount that should be allocated towards your down payment.

Selecting home based on down payment: If you are able to make a large down payment towards your home purchase, you should consider whether it is wise to do so vs. buying a cheaper house. A large down payment on your dream home could mean larger mortgage payments, while choosing to use that same amount towards a home that is less than what you might consider your dream home could mean smaller mortgage payments and more money available to use to cover other expenses.

Don’t forget other expenses
One of the biggest mistakes that homebuyers make is to overlook their other expenses when calculating how much disposable income they will need each month. You can avoid making such a mistake by ensuring that your budget is up to date and includes all of your monthly expenses, such as utilities, other loan repayments, any car payments and insurance, and property taxes that will be owed on your new home.

If you currently live in a rented property, some of the expenses for home repairs and incidentals such as repairing a pipe to mending a fence might have been handled by the owner of the property. This means you should consider setting up a rainy day fund for these items. If the availability of financial resources could be an issue, buying a cheaper home might be a better choice.

Other positives of a cheaper home
Buying a cheaper home has other benefits in addition to the possibility of a lower down payment. .Consider, too, that lowers monthly payments and more disposable income means being able to add more money to long term savings, such as your retirement nest egg and college funds. Finally, it could mean the difference between being able to stay in your home vs. going into foreclosure if your financial status takes a negative turn.

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Source-secondary

The right time to buy a house

If you’ve been considering buying a house but you’re still unsure, consider some of the personal and economic conditions that favor home purchases. If you find that a number of these signs ring true for you, it might be time to contact a real estate agent and start shopping.

Funds for down payment
Having a hefty down payment helps in the same way as finding a low interest rate. Ultimately, the less you owe, the less you’ll have to repay and the less you’ll have to tack on for interest. If you find yourself with a nice lump of cash, putting it toward a home purchase is definitely a solid financial investment. Just think, you’ll be building equity in your home which you’ll see again when you sell, and you’ll have somewhere to live in the meantime.

You’re ready to commit
Home ownership comes with a plethora of responsibilities, including home maintenance, property taxes and the process of selling the property when it comes time to move.

Legal fees, moving expenses, and all incidental costs associated with buying a home can really add up. To make the most of these costs, it’s best to plan on living in your new home for a stretch of time. Consider whether you have a stable job that will provide a solid income for a mortgage, and if there’s any chance you’ll have to relocate in the near future. If you feel you can commit to sticking with a home for at least five years, then it might be just the right time for you to buy.

Owning costs less than renting
If you’ve examined your  budget and realized that your monthly payments associated with buying a home are less than you’re currently paying in rent, it’s time to consider a home purchase. Talk to your bank and look at what your mortgage payments would be for a variety of different properties and gauge what you can afford. Factor in any additional costs you may have to pay, such as condominium fees or extra utility bills, and compare your total costs to what you’re paying in rent.

Buyer’s market
When demand for housing is low and there’s a wealth of properties on the market that aren’t moving too fast, that’s known as a buyer’s market. You’ll have a lot more bargaining power under these conditions than if you’re buying in a seller’s market, which is when demand for homes is high, resulting in few properties on the market that are selling fast. In a buyer’s market, chances are you’ll be able to negotiate a seller’s list price down – sometimes quite substantially – and save yourself a lot of money in the process.

Low interest rates
When interest rates are low, it’s a great time to look at buying a home. You will be able to get a reasonable interest rate on your mortgage loan, which can save you a lot of money in the long run. A home is generally the single largest purchase anyone makes, and the amount of interest tacked onto a mortgage really adds up over the years that you’re repaying the loan. Even a difference of a fraction of a percentage point can make a pretty big difference over the long term.
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Source: Secondary

Joining hands worth for bigger loans

Due to the very nature of a home loan, which entails a large sum of money and long repayment tenure, a co-applicant works out to be a relatively significant corpus. Most home loan borrowers find it a daunting thought to imagining the way in which this huge burden of amount could in some way be reduced. Remember, your dear ones can commit you more than emotional support when you decide to go in a home loan..

Every lender grants two or more persons to jointly apply for a home loan. By applying along with a co-applicant, your eligibility increases and you can avail a higher loan amount. However, only people with certain specified relationships like father and son, husband and wife, brothers are authorized to apply as co-applicants. Besides these, other relationships are not allowed as co-applicants. Furthermore, the co-applicant requires having a regular source of income. All co-applicants are not enforced to co-own the property but if there are co-owners in a property then all of them need to be co-applicants. While choosing a co-applicant, confirm that his credit history is good with no loan debts.

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Source: Secondary

7 Ways to Avoid Debt Trap

Debt Trap is like a Chakravyuh, Its easy to enter but impossible to get out like Abhimanyu. Improper Financial Planning is responsible for falling into debt trap. There are few tips on how to avoid Debt Trap.

1. Avoid too Many Loans: As a thumb rule, EMI of all loans availed should not exceed 45% of take Home Salary / Net Income per month. If it exceeds this limit then we are inviting trouble for ourselves. If majority of loan portfolio comprises of unsecured loans like Car Loan, Personal Loan etc then it shows credit Hungary behavior & we need debt counselling. Secured loans like Home Loan is considered to be good in debt portfolio. All the unsecured loans should be serviced first

2. Debt Portfolio Planning based on  Future / Potential Earnings: This is the biggest mistake we commit. Indians are very optimistic lot and always rely on Future / Potential earnings like Next Year’s Bonus, Future Salary hike…Wake up my friend, Due to global impact Indian Economy is now as fragile as American Economy. Pink Slips are now reality in Indian Inc. If god forbids and anything goes wrong then its a disaster. It is better to service all loans before 40 years of age & stop relying on Future / Potential Earnings.

3. Credit Cards – The Sweet Poison: The biggest contributor to debt trap. We spend as if we need not to pay back. If not used judiciously then it can act as black hole which will gulp us completely. On an average we are spending 1 Month’s expenditure in advance through Credit Card based on assumption that we will pay from next month’s salary. If this 1 month cycle exceeds by even 10 days due to some emergency then the interest will pile up like ripple effect so financial discipline is important while using credit card.

4. Emergency Funds: At any given point of time, we should have reserves equivalent to 6 times the monthly expenditure in contingency fund including Loan EMI’s. This fund should not used at all. It helps to tackle any unforeseen circumstance.

5. Avoid Borrowing for Luxuries: Luxuries can wait but basic survival cannot wait. We tend to borrow for Foreign trips, LED TV’s etc. Always spend on luxuries from savings to avoid debt trap. The social pressure plays key role in this regard but please understand that no one will come to your rescue during difficult time.

6. Don’t rely on Friends and Family:  Its better to be self reliant rather seeking help of others in emergency / debt trap.

7. Listen to your Mind in Financial Matters:  Last but not least, Always listen to your mind, not your heart in Financial matters to avoid debt trap. Our heart is our biggest enemy in Financial Matters and always give wrong advice. Its better to depend on more reliable “Mind”.
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Source: Secondary

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.

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Source: Secondary

Financial Strength: Not Always Equal To Good Credit Health

Many people think that if you are financially strong, you can get whatever you want. You can conquer the world if you are financially strong, but what do you mean by financial strength?

Financial strength really means that you have good amount of funds to sustain yourself and your family for a period of time. At this period of time, requirement of loans for such people are not necessary. 

But in case if they require loan of expansion of their business or any other purpose, their income is not the only factor which is considered. The factors which are considered other than income, which are their credit score as well as their credit health. 
            

Credit score and credit health will be a new term for many individuals. 

Basically credit score is a three digit numerical figure which is a snapshot of the credit health of the individual. Credit score ranges from 300 to 900 for all the bureaus. Credit score is generally considered as the prime factor in approval of loan, credit card. Nowadays telecom companies and insurance companies also check the credit score of the individuals before their enrolment with them. 

Credit score are calculated by the credit bureaus of the country. Considering India, there are three bureaus which are Cibil, Experian and Equifax. High Mark is also been rising bureau in India. These bureaus collect all the information of every individual from all the banks and financial institutions in the country.  

On the basis of their present and past credit behaviour, these bureaus rate the individual. If the individual has been frequent in paying their dues, his credit health would be considered as good. On the other hand, if the individual has been defaulting the dues or not making the payment in time, his credit health would be considered as poor. 

Individual with good financial strength can have good credit score. Even individual with good financial strength can have a low credit score and poor credit health. Individuals with bad credit health can face many difficulties in the future.

This is also the truth that, people who are financially strong are careless regarding their payments. Being careless about their payments can turn themselves into defaulters. Defaulting on payments can have a negative impact on the credit report of the individuals. 

So, individuals who are financially strong should be careful with their payments. They should also see to it that they pay their due on time to avoid any negative remark on their credit report. 

Due to the negative remark on their credit report, their credit score gets low and their credit health becomes poor. The lowering of credit score and poor credit health can also lead to financial loss. 

Individuals with low score and poor credit health pay high interest rates on loans as well as on credit cards. To avoid payments of high interest rates, they should make efforts to improve their credit score and be credit healthy.

To improve their score and make themselves credit healthy, individuals can take the help of credit health management companies. These companies assist individuals to improve their score and maintain their credit health.
Visit: www.cibilconsultants.com
Source: Secondary

Home Loan from Housing Finance Company

1. Higher Loan to Value Ratio: This is the biggest plus point for a Housing Finance Company. As HFC is not governed by RBI therefore they can include stamp duty and registration charges towards the cost of the property. Let’s understand from an example if a person is buying a property worth Rs 100. The stamp duty and registration cost of the property are Rs 6 i.e. 6% (Average). In this case, total cost of the property is Rs 106. Depending on my Home Loan Eligibility, Bank will approve LTV of 80% on Rs 100 i.e. Rs 80 as bank will not include Rs 6 towards the cost of a property. In short, he avail loan from a bank, he have to pool in Rs 26 from his pocket and his effective loan to value ratio is 75.47%.

Considering, he avail Home Loan from Housing Finance Company. In this case cost of property for Home Loan will be considered as Rs 106 and Loan to Value ratio of 80% effectively means that he can avail Home Loan of 80% of Rs 106 i.e. Rs 84.8. In this case, he have to pool only Rs 21.2 from my pocket. For simplicity purpose, he explained with an example of Rs 100 but it will be substantial amount considering the High Value of Home Loan. To summarize, Own contribution in case of Home Loan from Housing Finance Company is lower compared to bank thus higher home loan value.

2. Tie up with builders: Builders also deserve equal credit for the success of Housing Finance Company. It’s a win-win situation for both the parties as HFC’s offer higher commission to builders, are bit lenient on the legal process and most importantly, offer subvention schemes. Banks cannot offer subvention schemes due to strict RBI guidelines. Builders push loan from HFC very hard especially small  builders. USP is Pre Approved Project, therefore, minimum documentation and hassle free processing. Buyer is not able to understand the disadvantages of this trap. Builders de-sell, banks or Home loan providers who have not approved his project. As a thumb rule, you should never invest in a project which is not approved by at least 5-6 Home Loan Providers including 2-3 Banks. Buyers fail to understand that HFC’s are very lenient on Legal Check process therefore they have to be careful. Any project which is not approved by any of the banks and only by HFC/s is a big NO. The strategy of the builder is to get the project pre-approved at the time of launch and then there is a large scale deviation from approved layout plan. Banks don’t approve such projects.

3. Higher Home Loan Eligibility: A Housing Finance Company is a bit lenient in fixing the Home Loan Eligibility depending on the income, liabilities, risk assessment etc. As mentioned there is high pressure to re-deploy the funds due to high cost. Moreover, they have to compete with big boys. As a thumb rule, you can expect 10% more Home Loan Eligibility through Housing Finance Company compared to Banks. It’s a big incentive for the borrower as it means less burden on their pocket.

4. Self Employed & Businessmen: In India, we suffer from the colonial mindset of being a Servant. In Hindi, Private Job is called “Naukri” and though we don’t like but an employee is “Naukar”. We prefer “Naukri” over entrepreneurship because of steady income. The same mindset is a roadblock at the time of availing loan. It is very difficult for self-employed and small businessman to avail Home Loan. Loan requirements are stringent compared to Salaried class. At the same time, Housing Finance Company is a bit lenient in terms of calculation and consideration towards business income of non-salaried class. It is observed that non-salaried class i.e. self-employed and small businessman prefers Housing Finance Company for Home Loan requirement.

5. Low weightage to CIBIL Score: A Housing Finance Company especially small HFC’s are lenient on CIBIL score consideration. Seen cases wherein people with CIBIL Score of 700 received Home Loan approval. Whereas with banks score of less than 775 means end of the dream to own a house. This point is very subjective and depends on case to case basis. There is no general rule, but normally HFC’s are also bit lenient on CIBIL Score requirement. The only word of caution is that Many people with low CIBIL score paid a commission of 5% – 10% of Home Loan value to DSA to get Home Loan approved. It’s an unethical practice. Please note that DSA’s of HFC’s take undue advantage of the borrowers. They can’t influence even 0.1% of Home Loan Process. Always deal with a responsible employee of Bank / Housing Finance Company to process Home Loan. You may utilize the services of DSA only for the operational part.

To summarize, Selection between Bank and Housing Finance Company is a sort of prisoner’s dilemma. By being lenient on Home Loan process, a Housing Finance Company is doing more harm to a borrower than good. Whereas borrower perceive it otherwise. Because of this reason, you may observe that Home Loan default is more common among HFC’s Borrower compared to Big banks. Risk Assessment of a borrower should be non-negotiable. From borrower’s perspective, it better that Loan is rejected at initial stages instead of EMI default at later stages. It is always suggest buying a property with min 40% self-contribution.

Visit- http://www.cibilconsultants.com

Source-secondary