What Is Credit Review And How Does It Work?
When you apply for a loan, you do not receive funds immediately after submitting your documents. The lender takes time to verify the information you provided and check your credit report regularly to ensure authenticity. Once you meet all the requirements cited by the lender, only then they will disburse the funds to your account. But the process does not stop here. The lender also periodically conducts a credit review to re-analyze your credit profile and assess your creditworthiness.
Any creditor including your bank, a financial service institution, credit bureau, or a settlement company can conduct credit reviews.
What Is Credit Review?
A credit review is a step in the credit appraisal process in which the lender evaluates your repayment potential using various criteria. The lender decides on the approval amount and interest rate depending on the outcome of the evaluation. Credit review is conducted at multiple stages.
What Factors Are Considered During Credit Review?
1. Credit Report
A credit report is available with the credit bureaus such as Experian, Equifax, and TransUnion. The lender will request this report soon after you apply for a loan. A credit report includes the number of EMIs paid on existing loans to date, payment history, information on past defaults, recordings of debt settlements, foreclosure information, and much more. If the type of information mentioned on it is positive, you will receive funding on favourable terms.
2. Capital
The concept of capital becomes relevant if you are an entrepreneur applying for a business loan. The capital amount represents the cash balance and the physical asset both. The lender further evaluates the company's liquidity position.
3. Employment
Your working status influences credit decisions whether you are a salaried employee or a business owner. Besides employment, the employer's reputation is also vital. If you work for a start-up or a small business, such as a shop, you are most likely to experience delayed salary credit, and hence, lenders might see you as a potential borrower with higher risk and thus, reject your loan application.
4. Debt-to-income ratio
This ratio provides information on what portion of your monthly income is utilised for debt repayment. You can calculate this ratio by dividing the EMIs of all ongoing debts from the monthly earnings. If this ratio is over 50, it may affect your credit score and the lender’s decision.
Suppose you earn Rs 75,000 a month. The EMIs for ongoing debts include-
- Rs 15,000 for a personal loan
- Rs 25,000 for a home loan
- Rs 15,000 in a used car loan
Rs 55,000 from your monthly income is consumed on debt repayment. Out of the remaining Rs 25,000, you have to manage groceries, accommodation, conveyance, and a few more, leaving no room for taking on an additional loan. In such cases, opting for an instant loan online can provide quick financial relief without the lengthy procedures of traditional loans.
5. Collateral
Collateral is reviewed if you are applying for secured financing. A physical inspection will be carried out to determine the property's worth and review leakages and damages. If you are collateralising an investment document, the lender will go over the investment amount, maturity value, and time to maturity. Investments pegged to market volatility, like stock SIPs, can never serve as collateral. Lenders usually prefer assured income instruments like government-backed bonds, life insurance with monetary benefits, and fixed deposits, which reflect strong financial health.
Also Read: How to Improve Your Credit Score
Different Types of Credit Review Process
Credit review is done on any of the following three stages.
Stage 1: During application process
The lender performs a credit review at this stage to decide on the loan amount and interest rate. The primary considerations at this stage are your income, occupation status, employer credibility, and credit report.
Stage 2: Periodic review
This credit review takes place during the repayment process. The lender does this to ensure that your repayments meet the required standard. If you are having financial difficulties and applying for rescheduling, a credit review can be performed midway to determine the new loan terms and conditions.
Stage 3: Self-review
Self-review is a credit review process conducted by the applicant itself. This procedure is also known as a soft inquiry. The applicant reviews their credit report by visiting the bureau's official website.
Does Credit Review Affect Credit Score?
The purpose of credit review is completed after obtaining a credit report from the bureau. This entire procedure is known as a credit hard enquiry. If multiple lenders request your report at the same time, the credit bureau perceives you as a credit-hungry individual. The scenario further leads to a drop in your credit history significantly.
Also Read: Learn Everything About Personal Loan Disbursal Process
Conclusion
Credit review is an important part of the loan approval process. To complete this step successfully, ensure that your credit score is in good shape and that your debt-to-income ratio is less than 50%. If you have another source of income, include it on your credit report as well.
Frequently Asked Questions
1. What is a debit and credit note?
A debit and credit note are documents used to adjust invoices. A debit note is issued by a buyer for returns or overcharges, while a credit note is issued by a seller for refunds, discounts, or pricing errors.
