A few segments might find it harder to get a loan. “Banks have become more stringent about lending to the self-employed because there is greater uncertainty about the sustainability of payments from this segment,” said a senior banking official at a mid-sized bank. He added that those who still lend to this category impose higher margins and fixed obligation to income ratio (FOIR), or ask for higher credit scores.
Among the salaried, those whose pay has been cut may find the going difficult. Says Sahil Arora, director, Paisabazaar.com: “People working in the sectors worst hit by the pandemic may face difficulty.” Borrowers can take several steps to improve their chances of getting a loan. They should offer to pay a higher portion of the price of the vehicle. “If you agree to pay 25-30 per cent of the price, instead of 10-15 per cent, the lender may be willing to lend,” says Rishi Mehra, chief executive officer, Wishfin. According to him, those with an EMI to take-home salary ratio of 30 per cent or less enjoy greater eligibility.
The self-employed can improve their chances by demonstrating regular income inflow and regular filing of tax returns. Among the salaried, those working for more established employers are likely to be viewed favourably. Banks are also more comfortable funding the purchase of a new car than a pre-used one. You also stand a better chance of getting a loan from a lender that you have a relationship with. “We have a large base of pre-qualified customers for whom no or minimal documentation is required,” says Sumit Bali, president and head-retail lending, Axis Bank.
A sound credit history and a high credit score help greatly. “The better your track record in making repayments — for both revolving credit (credit cards) and instalment loans (like personal, education, home, etc.) — the higher are your chances of getting a loan,” says Shetty. Also, keep credit utilisation low. Credit utilisation is the percentage of available credit that you tend to use. For example, if you have a limit of Rs 1 lakh on your credit card and spend Rs 40,000 every month, your credit utilisation is 40 per cent. If you lower it to, say, 25 per cent by using two cards, you will seem like less of a potential risk.
Customers should also focus on getting the best rate. Again, the credit score is paramount. Some banks have six risk categories. The interest rate for those in the first three categories is lower than for those in the latter three. “If you have a low score or no credit history, you may fall in the higher-risk categories and may have to pay a premium over the card rate,” says Shetty. He suggests taking the time to build a good credit score before applying.
According to Arora, you can get a good rate by comparing, since credit risk premiums and lending rates vary widely. He suggests finding out the rate offered by the car dealer or the captive car finance company first, then approaching the bank or NBFC with which you have a relationship. Finally, compare rates offered by other lenders on an online marketplace to arrive at the best rate.