January 18 , 2013
There are very few individuals or households that would never have to borrow in their entire lifetime. Buying a home out of own finances is out of the reach for majority of Indians. Most people end up taking on a loan to finance home, vehicle, consumer goods or for some event.
While loans are to be avoided as much as possible in most cases, by postponing expenses and creating required corpus or by arranging alternative sources of funds partially or fully, sometimes loans are the only way out. Below are a few basic facts that commonly apply to all sorts of loans.
Eligibility for loans
Lenders want to be satisfied that you have reasonable repayment capacity. They judge this by screening parameters such as current income of applicant, number of dependants, savings habit, income of spouse, assets and liabilities, nature of employment, employment history and credit history. If they don't do this they risk getting out of business. NPAs are the biggest nightmares for banks and NBFCs.
Lenders collect these details from the documents you submit; from passbook, form 16 and what you tell them. What about credit history? How do they trace that? Loan repayment history of every person who has borrowed from a financial institution is recorded by CIBIL- Credit Information Bureau India Ltd. This record is used by lenders while approving loans.
Lending limit for loans
Lenders are not obliged to loan you the entire amount you require even if you come clean through all their lending criteria. Banks and financial institutions have 'margins' for different loans. Loan margin is the percentage of the total expense that the lender will not pay. For example if a bank has a 10% margin for a particular kind of loan and you need a loan of Rs 2,00,000 the bank pays a maximum of Rs 1,80,000 while the rest has to be arranged by you.
Loan margin is more critical in home loans when the home is an under-construction one. At different stages different amounts have to be paid. Each time the bank ensures that its stake does not exceed the margin.
Documents required for loans
While applying for any loan you can expect to be asked to furnish standard documents like identity proof, address proof, income proof, latest bank statement/passbook and last 3 years Income Tax Returns (ITR) statement.
Any of following documents are generally accepted by lenders as proof of identity- PAN card, passport, driving license, election card, photo identity card issued by the govt, defence services, PSUs, Aadhar card issued by UIDAI.
For proof of residence the most commonly accepted documents are latest electricity bills, latest telephone bills, passport with present address, registered house lease, ration card or latest property tax/water tax bills.
Income proof for a salaried person would be latest salary slip, form 16 from the employer and ITR statements for past 3 years. A self employed professional or businessman is required to submit proof of existence of business, ITR statements of self and business and at times profit and loss statements of past 3 years.
What you can do to enhance eligibility
There are certain things you can do as a practice to put lenders at ease while lending to you. Just like you'd never lend your hard-earned money to someone who you have the faintest doubt won't be able to repay, banks want to lend to those who can and will repay on time. So they check CIBIL records, like we mentioned at the beginning. If you have borrowed through a formal channel in the past, your repayment history is in CIBIL's records. Better keep it clean by not defaulting on any repayments.
Generally lower the amount borrowed for any particular expense, higher the probability of getting a hassle-free loan. For instance when buying a home worth Rs 60 lakhs you stand better chance of getting a loan if you are able to cough up 40-50% of the amount yourself and apply for 60-50% of the amount than if you applied for 80% which is the maximum lending for home loans. Of course, this might mean you must wait for another four to five years building the corpus before approaching a lender.