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 the authenticity of the documents. 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 conducts a periodic review to re-analyse your credit report.
 
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. 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, information on past defaults, recordings of debt settlements, foreclosure information, and much more. If the 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. Suppose your annual revenue is Rs 50,00,000. But instead of retaining liquidity, you reinvest Rs 48,00,000 in various opportunities or stockpiling. The likelihood of denial is high here because, during a crisis, paying off the debt becomes unmanageable.
    

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 high-risk borrower 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, the likelihood of rejection is higher.
    
   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 an additional loan. 
    

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.
    

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 credit review process is completed after obtaining a credit report from the bureau. This entire procedure is known as a 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 score significantly.
 
Also Read: Learn Everything About Personal Loan Disbursal Process
 

Final Words

 
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.