Have you ever been curious about what goes on behind the scenes when a lender considers your loan application? What makes them approve or decline your request? If you have, then here is your answer: it’s your credit review.
The terms and conditions of the loan are also based on your credit review. It decides what will be the tenure of the loan, the interest rate, and the principal loan amount. That means your credit review is quite a significant component. But what is a credit review?
To understand the credit review’s meaning, let’s dive into the definition and purpose of a credit review and other aspects associated with it.
What is Credit Review?
A credit review is a process in which the credit profile of individuals or businesses is monitored to assess their creditworthiness and repayment capacity. Your credit review is like a report card of your credit history and current financial situation. It decides whether you have the ability to repay your debts.
Credit reviews can be done by your lender, financial institutions, settlement companies, or credit bureaus like TransUnion CIBIL.
Purpose of a Credit Review
Your credit review serves the following purposes:
- A credit review allows lenders to assess your present financial situation based on your income, debt levels, and overall financial stability. It assures them that you have the potential to repay your loans, and the credit risk associated with you is low.
- The credit review process also contains a thorough analysis of your credit history. It demonstrates your repayment patterns and overall financial reliability in the past.
- Credit review also reveals any financial setbacks such as bankruptcy filings or loan defaults in front of the lenders. These factors can influence your chances of loan approval.
Types Of Credit Review
A credit review can be performed in the following situations:
1. During the application process
The credit review in this process is done by potential lenders to assess your creditworthiness when considering your loan application.
2. Periodic review
Periodic reviews are conducted during the loan repayment period. They ensure your continued repayment capacity. If any issues arise during this phase, the borrowers and lenders can renegotiate the loan terms based on current situations.
3. Self-review
A self-review is an informal assessment done by the borrowers themselves which is also referred to as soft inquiry. It helps them gauge their financial standing and take necessary steps in case of any inaccuracies.
Key Factors Evaluated in a Credit Review
Here are some factors that lenders consider when performing a credit review.
- Credit report: Your credit report includes detailed information about your current and past loans, repayment patterns, credit limits, and credit inquiries. It demonstrates your overall financial health.
- Employment status: Lenders often consider your working status, whether you are a salaried employee or business owner when making credit decisions. They might reject the loan application if they think you do not have a regular source of income.
- Collateral: Collateral is reviewed in the case of secured loans to determine the worth of the asset and check for any damages.
- Debt-to-income ratio: This ratio declares the amount of your income you use to pay your debts. A low debt-to-income ratio indicates better financial health.
- Type of credit: The credit type you’re applying for can affect the review process. A secured loan involves detailed scrutiny of your collateral, while in an unsecured loan, lenders focus more on the credit history.
Why Review Your Credit Report Regularly?
Regularly reviewing your credit report is essential to maintaining good financial health. Any issues in your credit report can directly affect your loan approval or even result in unfavourable interest rates. You can also be informed about your credit score and take the necessary steps to improve it.
Sometimes, you may spot inaccuracies in the report that may not be your fault. You have to raise a complaint with the credit bureau to resolve such issues.
Final Thoughts
Your credit review plays a significant role in determining your loan approval. It helps lenders evaluate your financial stability based on your credit history and current financial situation. In such a case, managing your creditworthiness becomes extremely crucial. This can be done by regularly assessing your credit report and taking necessary actions to improve your financial standing.If you are considering applying for a loan, ensure your credit score is in good range to increase your chances for approval. Check your credit score at Tata Capital, one of India’s leading financial institutions.
FAQs
Credit reviews can be conducted in the following ways:
1. During the application process by your lenders.
2. Periodic review is done during the repayment process to assess continued creditworthiness.
3. Self-review is done by borrowers to monitor their own credit profile and take steps to improve it.
To clear your credit review, you must ensure that your repayments are made in a timely manner. You can even pay more than the minimum instalment every month. You should also regularly review your credit report.
If the review is done during the application process, the quality of your credit report will influence your loan approval. If it's a periodic review done during the repayment process, and there are any issues in the credit review, the lender and borrower may negotiate new terms of agreement.
The credit review may take between 36 to 60 months, or it may be faster. It depends on the information being reviewed, your financial situation, and the lender's policies.
Your loan approval depends on the credit review. If the lender is assured, based on your credit review, that you can repay the loan, your loan will be approved. If the lender feels you are not in a position to repay your debts, your loan application might get rejected.
13 February 2025
4 mins read
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