How security is the important factor to get personal loan
Personal loans may be a quick way to receive much-needed cash. This can be used to pay for home renovations, unexpected medical expenses, starting a business, or a holiday.
On the other hand, getting a personal loan from a bank includes the client verification procedure after the loan application.
Unlike mortgages or vehicle loans, personal loans are often not backed by a guarantee. So lenders must check the eligibility requirements before accepting them. Lenders check your credit score, income, existing EMIs, occupation, age, and repayment history when considering your application for a personal loan.
About Personal Loan
When there is a need for rapid cash, a personal loan is the most outstanding alternative. It has the fastest disbursal time compared to other loans on the market. Given how simple it is to obtain a personal loan, a statement from the RBI in March 2021 revealed that personal loans had grown by 13.5%. (Y-o-Y). This shows that more people are interested in personal loans to cover unexpected needs and make ends meet.
Remember that credit risk evaluations are performed before the lender approves a loan. Let us learn more about credit risk assessment and the most important aspects that influence credit risk in personal lending.
Loan Risk
The risk of loss a lender bears due to a borrower’s inability to repay any loan is referred to as “loan risk.” Loan risk assessment is a method in the personal loan industry that shows whether or not an individual should be granted a specific amount of credit.
This approach considers the risk that the lending party will have to bear if the loan’s principal and interest are not paid.
Since the pandemic outbreak and the ongoing loan crisis, credit risk assessment has taken centre stage for financial institutions. Loan risk assessment is a complex procedure for most financial institutions, as it involves reviewing the bank’s capital and loan reserves simultaneously to reduce losses caused by bad loans.
With regulators demanding greater openness, banks must do extensive background checks on their clients and appropriately calculate the related loan risk.
The problem in personal lending is accurately analysing whether or not an individual can arrange for repaying the borrowed money. The loan amount, payment schedule, and loan tenure are all aspects that are checked.
While improving people’s access to credit can benefit the economy, it’s critical to consider the loan risk involved. When banks fail to undertake due diligence and give loans without a sufficient credit assessment, loan assets become non-performing assets (NPAs), resulting in losses to lending institutions and, eventually, the broader economy.
Factors Affecting Loan Lending
- Scope: The ability of the borrower to repay the loan is essential. The customer’s employment history, present job stability, and income quantity are all crucial indications of the borrower’s capacity to repay the existing loan in the case of personal lending. A well-balanced revenue and spending connection reveal not only the borrower’s financial capability but also his ability and judgement in business management. Borrowers who have college-going children or who are owners of small firms with fluctuating income flows are termed “low capacity” borrowers. The “debt-to-equity” ratio checks whether the borrower can produce the necessary funds to repay the loan. The borrower’s capacity is calculated by comparing current income (before taxes) to recurrent obligations.
- Assets: This element is used to determine the net worth of the person who has asked for a loan. It reflects the borrower’s total assets, including savings and investments in jewels. A high capitalisation rating shows that the borrower is well-capitalized to absorb any unexpected losses. While the borrower’s current income is utilised to repay a personal loan, the borrower’s capital is regarded as an extra reserve to fulfil demands in unanticipated situations.
- Conditions: When determining the risk that the lender will have to bear, external factors such as the economy, market, and industry circumstances are vital to examine since they will have an indirect impact on the borrower’s ability to repay the loan. The goal is to establish if the borrower can adjust to changing situations and be flexible enough to repay the loan during its duration.
- Security: Security is the borrower’s assets that can be pledged in their name as security for the loan given. This might include permanent assets such as the borrower’s land title and financial assets such as bonds. Security is only guaranteed for secured loans, not unsecured loans such as credit cards. We need to realise that collateral will not be utilised to evaluate a borrower’s ability. This is because collateral is only liquidated when the borrower fails to repay the loan in the worst-case scenario.
- Nature: Character is determined by the borrower’s moral integrity. It all boils down to the borrower’s willingness to repay the loan. It determines if the borrower will fulfil the credit obligation. The most important part of determining a borrower’s creditworthiness is character. The borrower’s repayment and credit management histories are examined to establish the borrower’s inclination to repay the loan. If there are signs of default, it shows that the borrower has been inattentive or careless in the past. This shows a negative character, resulting in lower scores.
Conclusion
Credit scores are sometimes used to screen loan applications along with these five loan risk assessment parameters. These factors are essential in establishing a framework and objectives that will allow lending institutions to judge the borrower’s eligibility for a loan.
Loan risk departments of lending institutions make decisions with the help of data. This helps them with loan risk and in arriving at reliable estimates of the borrower’s creditworthiness.
There are no complex rules governing how lenders weigh these features. Different lenders may value one feature more than another. Online lending platforms may prioritise character and capacity, whereas banks prioritise securities.
Fast, practical, and easy to secure, personal loans from recognised firms like Piramal Finance can help cover unexpected expenses or assist with your home upgrades, unforeseen medical expenses, starting a business, or even going on vacation without much fuss.