15-Mar-2017 written by : FSI-Team
Have you ever wondered how banks evaluate the loan applications and determine the eligibility of a candidate? Well, they use the credit report and credit score of the prospective borrowers to judge whether they are worthy of giving credit. The credit bureaus maintain a database of the borrowers with past repayment behaviour, based on the payment details received from various lending institutes. They use this information to calculate a credit score that ranges between 300 and 900.
A high score is a proof that the person is responsibly handing his credit facilities. For example, CIBIL the first credit bureau will receive information from the banks and other lending institutions for all your loans and other credit trade lines and update the status in your CIBIL report. Basis this information, your CIBIL score will get calculated.
A good credit score is a must if you wish to secure loans in future. For example when you apply for a home loan, the bank will first check your score to see if it satisfies minimum criteria fixed by them. If your score is below the benchmark you will fail to qualify for the loan. And if you clear the minimum criteria your loan application is likely to be processed.
Though almost all mortgage lenders check the CIBIL rating of borrowers, none had linked the cost of the loan with the credit score until recently. The pricing model was standardized across all customers. Differential interest rate was not prevalent in the Indian financial market. Say for example the minimum credit score needed for an ICICI home loan is 720. Two people with a credit score of 760 and 820 would qualify for the loan and get the same benefits and interest rates since they both cleared the minimum criteria.
Recently Bank of Baroda has taken a step to reward the customers with exemplary credit performance. It has announced that it will offer differential home loan interest rates linked to the credit score of an individual. A person with a credit score of 760 and above has a very low risk of default. Hence they can get home loans at 8.35%. For credit scores between 720 and 750 the rate of interest is 8.85%. People with less than 720 score will have to pay an interest of 9.35%.
Usually banks keep an extra spread over their MCLR for fixing home loan rates. But BoB has decided to reward people with a good credit standing by offering the home loans without charging any spread. BoB’s interest rate of 8.35% is lowest among all banks in India. SBI home loans and ICICI home loans are available at 8.65% and 8.7% respectively.
For a loan of Rs 50 lakhs taken for a period of 20 years, The EMI @ 9.35% is Rs 46,118 while that @ 8.35% is Rs 42,918. With a monthly saving of Rs 3,200 people with an outstanding CIBIL rating stand to gain a lot from BoB home loans.
Bank of Baroda is the first bank to implement this risk based pricing. Other banks are yet to follow suite. But it will not be long when other banks will take cue from this initiative and introduce differential interest rates. This initiative is in fact a motivating factor for borrowers to improve their credit standing. After all a home loan is a long term debt and a reduction of even 1% on interest rates translates into significant savings. Borrowers who maintain financial discipline in terms of timely payment of dues will have a high CIBIL score. They will pay less over the life of their home loans while people with a low score will have to shell out more money.
So if you wish to improve your credit score here are some quick tips.
Now that home loans based on credit score have arrived in India, you should not lose out an opportunity to save on interest costs. So improve your credit score and make the most of this offer.