Monday, October 29, 2007

Look before you leap

Look before you leap
How not to trip up while taking a loan.

Applying for a loan is a complicated process where a customer is faced with many bewildering choices. It is important to make the right impression on your loan officer to get the loan you want. However, there are some things that you should just not do. Here are 10 common-enough pitfalls to avoid while applying for a loan.

1. Don’t lie in your application form

All the columns in the application form are meant to provide vital information that the prospective lender uses to evaluate your creditworthiness. Do not leave out any important details about your income, your address (both temporary and permanent) and about your past or existing relationship with the lender. All this information has also to be supported by documents. Lying in the application form amounts to fudging documents.

2. Don't fudge salary slips and income statements

Don't ever fudge salary slips or income statements. You loan officer handles hundreds of loan cases. The chances are, he knows ever trick in the book before you could even think of one. Fudging salary slips is a serious offence. It is fraudulence of a high order. Don't ever do it. Not only will you not get this loan, you can even be blacklisted by not only this lender but by other lenders too (given the amount of information-sharing between companies).

3. Don't go in for a co-applicant unless it is necessary

Loan officers are notoriously conservative. The greater the pile of documents related to your case in their files, the more comfortable they feel. You should always put your foot down when a loan officer asks for more guarantors or asks you to bring another co-applicant. The loan officer could be convinced of your case but may be merely trying to protect himself from all possible eventualities. If you follow his dictates, you are killing the prospects of the co-applicant to procure a loan for herself in the future.

4. Don't offer proof of a lavish lifestyle to prove creditworthiness

Your loan officer is only interested in seeing the adequacy of your income. This emerges clearly out of the income documents you submit with your loan application. So, an effort to project a lifestyle merely to impress him is a definite no-no. It could even backfire on you if he feels that you are living beyond your means. Remember, he can reject your loan application on this ground. If you ever blew your month's salary on your favorite perfume or that gorgeous pashmina shawl, please don't tell him.

5. Don't bounce or return cheques

Your bank statement speaks volumes about your spending habits. It mirrors your spending behavior. It provides your loan officer with a comprehensive view of how you manage your money. If there are too many cheques bounced or returned check entries in your bank statement, be prepared with a convincing explanation and papers to prove it. Generally, though, there should not be any cheque returns or bounced cheques. It lowers your creditworthiness and could result in lower or no borrowing.

6. Don't show a cleaned-out account

Maintain a certain balance and show some savings in your account. Otherwise you will come across as someone who is barely able to meet his expenses. Savings in your account will show the loan officer that you'll be able to meet the EMI. Otherwise you will have to come up with a convincing plan of lowering your expenses.

7. Don't hide details about other loans

If there is a recurring payment on an existing loan, make sure you've mentioned the existing liability in the form. Since other loan repayments bring down your income-to-instalment ratio and result in a lower loan, this is a vital piece of information. Don't hide details about the loan. Consider consolidating all your debt before going in for another loan.

8. Don't fudge details of professional degrees

Loans to self-employed professionals are extended on the strength of the professional degree and the income (especially in case of a personal loan). In such a case, fudging your professional degree or income documents can seriously jeopardise your loan application. Professional qualifications are almost always verified.

9. Don't ever attempt to bribe the loan officer

You perhaps feel that your loan application is not strong enough to get you the loan amount you are asking for. And you probably think that you can grease the palm of the loan officer to enhance your loan eligibility. Don't even think about it. Even if you got lucky and your loan officer was the bad apple in the company's basket (it could happen), your loan is reviewed by two or sometimes three other people. You were not planning to bribe all of them, were you?

10. Don't take a loan against your FD as collateral. Break it.

A common mistake most borrowers commit is to borrow against their fixed deposit. They prefer taking loan against their own money at a rate higher than the rate they are receiving on their fixed deposit. You should consider this option only when you require funds for a very short term. Otherwise, it makes sense to encash your FDs. This way you'd be able to borrow less.

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