In today’s financial landscape, securing a loan has become more accessible than ever. However, banks and financial institutions meticulously evaluate your financial stability before granting approval. A common misconception is that a high CIBIL score guarantees loan approval. While it is undoubtedly a crucial factor, several other financial aspects influence the final decision.
If you’re planning to apply for a loan, do not solely rely on a good CIBIL score. Lenders assess various parameters before sanctioning a loan. Let’s explore the key factors that banks consider and essential points to keep in mind when applying for a loan.
Understanding the Debt-to-Income Ratio (DTI)
One of the critical aspects banks evaluate is the Debt-to-Income Ratio (DTI), which indicates how much of your total monthly income is already allocated to existing loan repayments. This ratio helps lenders determine your capacity to handle additional debt.
How to Calculate DTI Ratio
Formula:
DTI = (Monthly loan payment / Total monthly income) × 100
For instance, if your monthly salary is ₹50,000 and you are already paying ₹15,000 as EMI, your DTI ratio would be 30%.
What is an Ideal DTI Ratio?
- Below 40%: Considered good; increases loan approval chances.
- 40% to 50%: Some banks may approve the loan but with higher interest rates.
- Above 50%: Loan approval becomes difficult.
A high DTI ratio due to multiple existing loans can negatively impact your chances of getting a new loan.
Importance of EMI-to-Net Monthly Income Ratio (EMI/NMI)
When applying for a loan, banks also check your EMI-to-Net Monthly Income Ratio (EMI/NMI), which reflects how much of your net monthly income is used for loan EMIs.
How EMI/NMI Ratio Affects Loan Approval
- Less than 50%: Considered safe; increases chances of loan approval.
- 50% to 55%: Loan approval is possible, but banks may hesitate.
- More than 55%: Considered risky, making loan approval unlikely.
If you already have multiple loans, banks thoroughly assess your financial stability before granting a new loan.
Loan-to-Value Ratio (LTV) – A Crucial Consideration
For loans like home or auto loans, banks evaluate the Loan-to-Value Ratio (LTV) to determine how much loan they can offer based on the asset’s value.
Understanding LTV Ratio
LTV ratio indicates the percentage of the loan amount compared to the property value.
For example, if your property is worth ₹50 lakh and the bank offers a loan of ₹40 lakh, your LTV ratio would be 80%.
Ideal LTV Ratio for Loan Approval
- For home loans: Banks generally accept an LTV between 75% to 90%.
- Lower LTV ratio: Increases the likelihood of loan approval.
The Role of CIBIL Score in Loan Approval
Undoubtedly, the CIBIL Score is one of the most significant factors in loan approval. It typically ranges between 300 to 900, with 750+ being considered good. However, a high score alone doesn’t guarantee approval.
How to Maintain a Good CIBIL Score
- Pay loan EMIs and credit card bills on time.
- Avoid applying for multiple loans or credit cards frequently.
- Keep credit card utilization below 30% (e.g., if the limit is ₹1,00,000, avoid spending more than ₹30,000).
- If you already have significant debt, avoid applying for additional loans.
Steps to Increase Loan Approval Chances
If you want to enhance your chances of securing a loan, consider the following:
- Improve Your CIBIL Score: If your score is below 750, work on increasing it before applying.
- Lower Your DTI Ratio: Avoid excessive borrowing and keep EMIs manageable.
- Show a Stable Income: If self-employed, maintain proper documentation of your earnings.
- Maintain a Healthy Bank Statement: Frequent overdrafts or a low balance can negatively impact loan approval.
- Opt for a Joint Loan: If your credit score is low, applying for a joint loan with a spouse or parent can improve approval chances.
Conclusion
While a good CIBIL Score plays a vital role in securing a loan, it is not the only determining factor. Lenders also consider your income stability, existing financial liabilities, DTI ratio, and overall financial health. If your debt burden is already high or your EMI obligations exceed your income, obtaining a loan can become challenging.
Before applying for a loan, ensure you have strong financial planning, a healthy credit history, and a stable income to improve your chances of approval. Avoid unnecessary borrowing and manage your finances wisely for long-term financial security.