A Loan is another name of consumerism. An easy finance or loan is both good and bad for the economy. Recently, you must have read news articles on the Gross NPA’s of the banks. Though no one is willing to state the obvious, that it is a direct fall out of easy loans in past. The declining interest rates are good for an economy but to maintain the quality of a mortgage is a big challenge. It is another threat to the economy. It is called Easy Money. Though we can say that without consumption, the economy cannot grow and I do agree. But in this whole debate we miss a very crucial point that it’s a vicious circle. The worst affected are borrowers who are not able to repay this easy money. It left a permanent negative mark on the CIBIL Score of a borrower.
Typically, a loan is also granted to an individual who is a doubtful case. In short, the bank is not sure of repayment or risk is high. Not all borrowers in this doubtful category will default, but the probability is very high. Assuming 50% borrowers defaulted. In this case, the bank reports the same to CIBIL. Their accounts will either be written off or settled. Practically, these set of borrowers will never be able to avail the loan in future. To know how, You may check my post, How Financial institutions Kill CIBIL Score?. This cycle will continue. I am not economists but based on little knowledge i have and experience of my reader, i am sharing my views. The objective of this posts is to caution potential borrowers to evaluate whether they are in real need of a loan or not. Before availing any loan, please check its possible impact on your CIBIL Score.
Another aspect is the universe of potential borrowers. The mortgage cycle will not affect the economy if we continue to add more no of potential borrowers compared to no of borrowers being blacklisted due to default i.e. with poor CIBIL Score. With stricter norms and tightening of lending by banks to control NPA’s, it seems difficult. In short, the universe of potential borrowers is shrinking. Now you must be wondering why i am explaining the same to my readers. A loan has a significant impact on CIBIL score of a borrower. It is important to understand its effects on the CIBIL score before you avail the loan. Even after availing loan, a borrower should remain in the universe of potential borrowers else he will not be able to avail credit in future.
Loan – Check its impact on CIBIL Score
Whenever you avail any loan, it is being reported to CIBIL database including overdraft. A CIBIL report is financial kundali of an individual. It can tell the complete financial health of an individual. In other words, it is financial report card. Few of my readers said that they are not concerned about CIBIL report. I completely agree. A CIBIL Report is of NO RELEVANCE if you are NOT Planning to avail any credit in future. In such cases, you can just ignore your CIBIL report. Otherwise, it is in your financial interest to assess the impact of a loan on CIBIL Score. Let’s check out the impact on CIBIL Score
(a) Low value or high value: The definition of High Value or Law Value is entirely subjective. Depending on the financial condition, a loan of 1 lakh may be high for one set of borrowers and low for another set. As a thumb rule, the low-value loans impact CIBIL Score negatively. The reason being, it shows that borrower is not able to manage his finances very well. The loans like Consumer, two wheeler or overdraft should be avoided altogether. I came across multiple cases wherein the score of the borrower was good means more than 750, but the high-value loan was rejected. The reason being, in the risk assessment of borrower, the lender concluded that if an individual is not able to manage low-value requirement then for high value the probability of default is HIGH. As i mentioned, the high or low value will depend on the income level. For more details on the impact of a low-value mortgage, please check my post on the impact of a low value loan on CIBIL Score.
(b) Secured vs. Unsecured Loan: A secured loan is the one that is backed by the collateral. Examples are Home Loan, Gold Loan, etc. As a thumb rule, high value secured loans have a positive impact on your CIBIL Score. The Gold Loan is an exception. It may have a neutral impact. On the other hand, unsecured credit has a significant negative impact in case of default. Loans like overdraft, personal or consumer are unsecured in nature. Therefore, as a borrower your should avoid unsecured credit entirely. The exception to this rule is credit cards. A credit card is unsecured lending as there is no collateral. The good credit practices in Credit Card usage can increase the CIBIL Score of the card holder.
(c) Depreciating Assets: A depreciating asset is the one whose value depletes over a period. The best example is of the car and, on the contrary, the impact of Home Loan is positive on CIBIL Score. The reason being, the property is considered to be an asset i.e. value will increase over a period. It’s a BIG misconception that CAR is an ASSET. As a thumb rule, any credit taken for appreciation asset is positive and credit availed for a depreciating asset is negative. The borrowers should refrain from availing loan facility against depreciating assets.
(d) Luxury: If you are availing a loan for a foreign trip or wedding then it is considered as luxury loans. These are broadly classified as a personal loan but should be avoided. A credit facility should be availed only during the need of the hour. A vacation abroad can be postponed, and wedding expenses can be cut down. Therefore, the borrower should avoid any credit that is classified as Luxury.
(e) Guarantor: Last but not the least. If you are following good credit practices and maintaining good CIBIL score but your CIBIL score can be spoiled by others. If you are a guarantor to the loan of any 3rd person i.e. friend, family member or office colleague, then you are equally responsible for same. In layman terms, it is as good as loan availed by you. I discussed this in detail in my post Being a Loan Guarantor – Are you Risking your Future?
Words of Wisdom: Today it will be short and simple. It is very EASY to spoil your CIBIL Score but tough to REPAIR. Always use your credit facility intelligently and judiciously.
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