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Posts Tagged ‘personal loan’

How banks categorize whom to give loan?

In Banking, Finance on June 7, 2012 at 10:57 pm

In continuation of my earlier blog Understanding Types of Loan ……..

Now days, most of the banks use their own software to rate and assess the risk of its clients (people, group or corporates).This you can see by some professional working in top IT companies and working in senior management get loans very easily than person with same qualification working under a small company. Why this is so – it is due to his better credibility and stability to repay the loan.

Income level and the employment history are the major factors which affects the loans. However, the bank considers the major questions and rate or give a score according to its appropriateness.

I.         Do you make payments on time?  They check the borrower’s payment history through scrutinizing their credit card details, car payments, mortgages, student loans or other types of loan. ( such as bank gives 35% score to the perfect borrower under this category)

II.         How many other loans have been taken and its balance remaining?  They check about how many other loans like home loan, car loan etc. borrower has already taken and what is the balance remaining and link it to the borrower’s annual income. ( for example: bank gives 30% score to the perfect borrower under this category)

III.         From how many years you have opened these accounts and usage? They check the borrower’s credibility in case of payment e.g. a fresher who has applied for credit card usually get very low credit limit on his credit card than a professional working from 10 year with good bank records. ( for example: bank gives 10% score to the perfect borrower under this category)

IV.         How often you have applied for loan? They check whether you are not taking many loans at one time such as once you have taken home loan, for a year or so, you will be denied to take car loan. ( for example: bank gives 10% score to the perfect borrower under this category)

V.         How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? ( for example: bank gives 10% score to the perfect borrower under this category)

The higher the score, higher the chances of getting the loan. Each and every bank has its own risk assessment method and risk scoring that’s why different bank gives same loans at different rates to same borrower. Till now, we have considered, the bank or financial institutions factors which affect the loans.  See my next blogs on factors affects borrower’s decision to take loan from a bank or institution.

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Understanding types of Loan

In Banking, Finance on May 28, 2012 at 9:58 am

Money requirement changes over a period of time, some individuals require money to build house, some for marriage, buying an expensive car or it may be for kid’s education. Corporate houses have different requirements like starting a new business, expansion of existing business etc. These requirements can be fulfilled by selection of few options. First option is to self – fund, second option is to take loan (debt), third option is to raise equity and last is through partnership/joint venture and strategic arrangements. When self-funding is not available, corporate mostly avail a mix of debt and equity. Equity has lots of entry barrier and required large capital, individual go for taking a loan.

A loan is given by one party to another party with the agreement that money will be repaid after a certain period of time. In a loan contract, borrower (who takes the loan) pays certain percentage of the principal amount to lender (who gives the loan) as compensation for borrowing. Maturity date of the loan is the date by which the borrower must have paid the loan.

There are 2 types of loan – secured loans and unsecured loan.

When a loan which is guaranteed by collateral, it is termed as secured loan. Its best example is home loan – when a person buys a home, he/she make some amount as down payment to the builder and for rest amount he/she may take as home loan from a bank or financial institution. In case of default of the assets, lender (bank or financial institution) has right to seize home.

When borrower does not deposit any kind of asset against the loan, it is termed as unsecured loan. Personal loans, bank overdraft and corporate bonds are good example of this.

They are other very popular loans like business loans (type of secured loan) where borrower need to present a business plan, education loan (unsecured loan up to a specific amount) where borrower is a student and take this loan for higher education.

Now an interesting question arise in the mind how banks categorize whom to give loan or not. See my next blog on this.