Invest in Credit Risk Mutual Fund or not?

The festive season is here and lenders are coming up with a slew of offers to boost loan offtake. Already home loan rates are being slashed and there will be offers on other loans including consumer loans and even personal loans. While the offers may be lucrative, there are ways to get a better deal from the lenders. Here are some of the factors to keep in mind while availing of the loan offer to get the best deal.

Credit score

Your credit score has a significant impact on your interest rates as this tells the lender about your repayment history, financial discipline and your creditworthiness. “Credit history plays a crucial role. Your credit score will be assessed and verified by the lender. The lender will decide the risk premium on the basis of the information,” Raj Khosla Founder and MD MyMoneyMantra.com said.

If you have a lower credit score, it means there is a high credit risk, which would cause lenders to levy a higher rate of interest to mitigate their risks. On the other hand, if your credit score is high, it means there is low credit risk. In such a case, lenders can offer you a lower interest rate. This way, the interest rates significantly depend on your credit score. Generally, the minimum credit score to easily avail of a loan is normally 750.

Gender issue

Most lenders offer a better rate on home loans to female borrowers. Hence, if you are a male and have an option of roping in a female consider applying for the loan jointly. “Gender plays a role. Some of the best home loan offers are reserved for women. Applying with a female co-borrower will help in getting a better deal,” Adhil Shetty, CEO, Bankbazaar.com said.

Loan to value

If you are applying for a loan that requires you to mortgage something, like the house you are buying or gold, you need to keep the amount of loan to the value of the mortgage item low. If your down payment is high and your loan amount is kept low, you can get a better offer from the lender. “Loan-to-value and the quantum of loan availed play a role in the loan terms. You can get a cheaper loan if you keep these lower,” Shetty said.

Job profile

Lenders look for the borrower who has a stable income rather as this provides greater comfort on repayment of the loans. A borrower with a stable income is considered lower risk. Hence, lenders offer different interest rates to salaried and self-employed loan applicants. While looking for stable income, lenders also consider the profile and the stability of the company where you work.

Income level

The lender asks you to disclose your annual income so that they can easily assess the risk associated with the repayment capabilities. In most cases, if you have a higher income (comparing it with the loan amount you want), you can receive a lower rate of interest owing to reduced chances of default. “The effective rate of interest on loan is determined by the credit policy of the lender. The credit policy determines benchmark lending rate, spread and eligibility factors for specific products. On the customer’s side, factors such as age, income and repayment capacity play a big role,” Khosla said.

Loan tenure

Normally, when you take a loan with a shorter tenure, it attracts a lower rate of interest (even if the EMIs are higher) than taking a loan with a longer tenure (which will have lower EMIs but a higher rate of interest). While taking a loan, you should calculate the interest you need to pay by adjusting the tenure.