Effects of Early Loan Repayment on Credit Score

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Most of us don’t like the idea of taking debt unless needed. However, the vicious circle of credit wants us to first borrow money in order to build a positive credit history that would, in return, help us take a loan at considerable rate of interest in case of financial emergencies. Whether one has to lend money loan due to an emergency, to fulfil certain life goal or just to build credit, people tend to pay the loan amount early when they have extra cash in order to stay away from deb. But is it recommended? And how will it affect your credit score? Let’s find out! But, before we understand the effect of early loan repayment, let’s understand how loans affect our credit score.

Impact of Loans on Your Credit Score

Surprisingly, taking a loan is a step ahead towards creating a positive credit score, given that you pay the debt amount on time. Here’s how it affect your credit score.

Credit Diversity

If you already have a credit bill, then opening a new loan account will add diversity to your existing credit, which will enhance of your credit score

Duration of Credit History

Another thing that installment loans help you is to manage your credit over a long period of time. If you have a long history of great credit, then it will not only increase your credit score, thus making loan process easier for you.

Raise Credit Score with Timely Payments

Since, on time payments play the biggest role when it comes to increasing credit score, timely loan payments will not only improve your credit score but will make you an attractive borrower for future.

Loan Repayment

So, Should One Go For Early Loan Repayment?

Well, experts suggest that having an open loan/debt account is beneficial for your credit score rather than a closed one, which is what your installment loan becomes once it is paid off. So, if you have multiple debts, then you might consider closing one earlier. But in case of single loan, then you might consider it paying as per the schedule. Also, one must remember that paying off loans early will not have any positive impact of your credit score. However, depending upon your credit history, closing your loan account is not recommended in the following cases:

Limited Credit History

According to Experian, one of the major credit bureaus in India, open and active credit account enhances your score. So, in case you have limited or only open loan account, then it is not advisable to close it early. Yes, it will help you save money in interest but will not help in your credit score.

Establish Credit History

In case you have an established credit history, then with too much debt, the lender may see you as a risk. It is important to maintain the debt-to-income ratio. This is basically the percentage of your gross monthly income applied towards debt. This means that the gross income should be able to afford the debt taken.

Credit Utilization

Instead of paying off the loan, you can pay down the balance. One of the major factors affecting the credit score is the percentage of the available credit compared to the limit. Therefore, if you have taken a new loan or having an outstanding credit card bill, then paying off your personal loan can help lower the ratio.

Hence concludes that if you are paying off the loan early just to enhance your credit score, then don’t go ahead. Instead, you can invest that money in various schemes like mutual funds or fixed deposits or just save it for financial emergencies.  Whether you pay the loan amount early or as scheduled, one thing that every borrower should keep in mind is to always pay the due bill on time.

Credit Bureaus In India – CIBIL vs Equifax vs Experian vs Highmark

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When it comes to lending money, even the banks needs to be assured about the person to whom they are giving loan. Approximately 5 years back, customer background verification for credit worthiness was a difficult task. However, Credit Information Companies (or Credit Bureaus) have made this task easier. Credit Information Companies are financial institutions who collect and maintain credit and loan related information of individuals and commercial entities. Based on this information, they generate a credit report and score of every individual that helps the bank in approving or rejecting the individual’s loan application.

know your score

As per the latest guidelines, it is mandatory for every bank and financial institution to be a member of atleast one Credit Information Company in India. These companies collect and maintain the credit/loan information of every individual who has a PAN card from the member credit institutions. This information is updated regularly every month or on short intervals.

How Does Credit Bureaus Work In India?

As mentioned above, Credit Bureaus of Credit Information Companies collect, maintain and provide credit information (related to credit cards and loans) of an individual from banks and other member institutions and share the same with them that defines the credit worthiness of an individual. This helps the bank authorities to make a decision of whether to lend money and if yes, then at what terms and conditions. Here, one must note that CIC does not act as a watchdog. It caters the information related to salary, savings account, fixed deposits and other information are not shared by the members.

credit score rating

For example, if you wish to take a personal loan from a bank, your bank will contact the credit bureau for your credit report and score. This report contains all the payment history, including past defaults (if any). Based on the credit score and report, your bank will make a decision on whether the loan should be granted to you or not. More credit score means higher chance of getting a loan at a considerate interest rate.

In India, there are four credit bureaus namely TransUnion CIBIL, Equifax, Experian and Highmark.

TransUnion CIBIL

India’s first credit bureau/credit information company, TransUnion CIBIL plays an important role by helping banks and other financial institutions to manage their business. It is organized into 3 divisions, namely consumer bureau, commercial bureau and MFI bureau.

Year Of Establishment – August 2000

Scoring System – 300-900 (900 is the best credit score)

Charges – Free credit report once a year. Beyond that, it charges Rs. 550

Time taken to generate report – 7 days

Equifax

Equifax India is a joint venture between Equifax USA, State Bank of India, Kotak Mahindra Bank, Bank of Baroda, Religare Finvest Ltd., Sundaram Financial Services and Union Bank of India. It offers a range of credit services including information, business analysts and risk management.

Year Of Establishment – 2010

Scoring System – 1-999 (1 being the lowest)

Charges – Free credit report once a year. Beyond that, it charges Rs. 400 (+taxes)

Time taken to generate report – 10 days

Experian

Experian Credit Information Company of India or simply Experian is a joint venture of GUS Holdings, Axis Bank, Union Bank of India, Indian Bank, Federal Bank, Punjab National Bank, Sundaram Finance Ltd, Magna Fincorp Ltd and VIC Enterprises Private Ltd to provide credit information services to banks and individuals in India. It has also tied up with online financial marketplaces like Paisabazaar to offer free credit report and score to its customers.

Year Of Establishment – 2006 (got license in 2010)

Scoring System – 300-900 (900 is the best credit score)

Charges – Free credit report once a year. Beyond that, it’s Rs. 399 (including taxes)

Time taken to generate report – 20 days

Highmark

CRIF Highmark is the only credit bureau in India that caters the need of segments like MSME, commercial borrowers, retailer, micro-finance borrowers. It provides analytics, data management and related credit services in order to sustain the financial needs of business and customers.

Year Of Establishment – 2007 (got license in 2010)

Scoring System – Not Available

Charges – Rs. 399

Time taken to generate report – 5 minutes

WHAT TO DO WHEN HOME LOAN INTEREST RATES DROP?

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This year, Union Budget and the subsequent reforms brought good news for homebuyers in the form of lower interest rates on home loans. Banks rushed to reduce their home loan interest rates to offer buyers with better deals to buy the home of their dreams. The reduction in rates is good for new homebuyers who will get home loans at the lower rates. But how will the existing borrowers get benefits of these revised rates?

Existing borrowers have the option of home loan balance transfer which means that they can transfer the remaining amount of their home loan to another bank that is offering a lower interest rate. Since it a competitive market, some banks also give the option of resetting the interest rate so that the customers do not go to another bank.

To understand these two options better, we first need to know how home loan interest rates are charged by the banks.

 

What are the two types of home loan interest rate models?

Of late, banks have started following the MCLR models. On the other hand, independent housing finance companies are still using the prime-lending model. MCLR stands for Marginal Cost of fund-based Lending Rate. It is a benchmark rate below which the bank cannot lend.  Parameters like marginal cost of funds, operational cost, negative CRR cost and the tenure premium are taken into consideration to calculate the MCLR. Prime lending rate model is treated as reference rate for lending. Banks offer rates lower than prime rate to applicants with good credit score, whereas those who have poor credit score will be charged a higher home loan interest rate.

 

Benefits of MCLR over PLR

MCLR has been recently rolled out by the RBI to offer more transparency in the Indian lending market. Some of the advantages of MCLR model are-

  • These home loan interest rates are more dynamic and determined by the money market conditions and prevailing reforms. This dynamic environment is beneficial for the borrowers.
  • MCLR reflects the incremental cost of the sum and changes every month, thus offering the benefits of a lower rate to the homebuyers.
  • As opposed to PLR, MCLR actively reacts to the changes in the market.

One should remember that the home loan interest rates under MCLR model change only at a date predetermined at the time of taking the loan. Between two rate-reset dates, an MCLR works similar to the fixed lending rate.

 

Why should you transfer your home loan when interest rates drop?

Policy reforms and rate reductions make the environment better to take new home loans. However, existing borrowers can also make the most of this situation by transferring the balance of their home loan to another bank that offers better rates. This is a wise step to take in the early periods of your loan. Under this, the entire unpaid principal amount is transferred to another bank at a lower home loan interest rate. The new bank pays the entire outstanding amount to your previous bank and now you have to pay the EMIs for the same amount to the new bank at lower interest rates.

For example, if 50 Lakhs of your principal amount stands unpaid at 12% interest and you transfer it for a reduction of 50 basis points bringing the interest rate to 11.5%; you will save around 2.87 Lakhs in interest which is a considerable amount.

Here you should also know that home loan balance transfer is a lengthy process and involves documentation and formalities just like taking a new home loan. The bank will check your credit score and will take on the transfer only when fully satisfied. You will also have to pay certain amount as processing fee.

 

How to negotiate with your bank to reset your home loan interest rate?

Resetting your interest rate at the same bank is a much simpler process. Given the competitive sentiments in the market, banks do not want their customers to go to a different bank. You can simply do this by writing to your bank. There are two scenarios- the bank can either reduce your tenure or the interest rate. When tenure is reduced, though the EMI remains same, interest component reduces and principal repayment is increased. When the bank reduces your interest rate, it requires you to submit a new ECS and cancelled cheques.

 

What is home loan processing fee for DHFL Home Loan?

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A home is more than just a roof over your head; it is a feeling, a dream that you have nurtured for a long time. And in making this dream a reality, home loans play a very important role. Over the last two decades, home loan has come out as the best and most preferred way of buying a house. Not only the middle-class buyers, but the rich are also taking the home loan route to finance their home purchase. Sensing the high demand, several banks and financial institutions offer a variety of home loan products at attractive interest rates. One such lender is DHFL.

 

About DHFL

DHFL stands for Dewan Housing Finance Corporation Ltd., established in the year 1984. It is essentially a home financing company and offers home loans at competitive rates of interest. The company envisions transforming the standard of living in Indian households by giving them greater access to home ownership.

 

DHFL Home Loan

The interest rate on a loan is the most important factor to be considered by a borrower as it determines the amount that he/she has to shell out in the form of EMIs. DHFL offers home loans at attractive rates of interest to make home buying easier for the people. However, the interest rate differs for salaried and self-employed applicants. The lender also ensures that the home loan process is easy and hassle-free for its customers by keeping the documentation formalities minimal.

 

The table below gives a glimpse of DHFL Home Loan Interest Rates for salaried and self-employed applicants:

Loan Amount Interest Rates for Salaried Interest Rates for Self-Employed
Up to Rs.25 Lacs 9.00% 9.10%
Above Rs.25 Lacs to Rs.75 Lacs 9.00% 9.10%
Above Rs.75 Lacs to Rs.100 Lacs 9.15% 9.25%
Loans above Rs.100 Lacs to Rs.150 Lacs 9.15% 9.25%
Loans above Rs.150 Lacs to Rs.300 Lacs 9.35% 9.45%
Loans above Rs. 300 Lacs 9.75% 10.00%

 

Eligibility Criteria for DHFL Home Loan

DHFL offers its home loan services to salaried and self-employed candidates. Though the maximum loan amount is Rs 5,00,00,000 (minimum amount Rs 1 Lakh), it should not exceed 85% of the property cost. However, the exact loan amount that will be sanctioned to an applicant depends on several other factors like-

  • Age
  • Job stability and continuity of income
  • Co-applicant’s income
  • Educational qualification
  • Assets, liabilities and saving habits
  • Repayment capacity
  • Credit score

 

Processing Fees on DHFL Home Loan

Much like other home loan providers, DHFL also charges a nominal processing fee for its home loan product. For the salaried individuals and self-employed professionals, the processing fee ranges between Rs 5,000 and Rs 20,000 whereas for the self-employed non-professionals, it is charged at the rate of 1.5%. One should also note that additional service tax and cess are applicable on the mentioned processing fee. Also, this amount is non-refundable.

 

Other Features and Benefits of DHFL Home Loan

Following are the features of DHFL Home Loan-

  • The tenure of this loan ranges from 1 to 30 years but it does not extend beyond the retirement age or 60 years, whichever is earlier. This limit is 65 years for the self-employed individuals.
  • This loan can be taken for financing the purchase of a ready-to-move house or an under-construction house/flat.
  • The interest rate applicable on the loan is based on the Retail Prime Lending Rate (RPLR) of DHFL, which is subject to change as per the money market conditions.
  • There are two options to pay your home loan EMIs- Electronic Clearance Services (ECS) or post-dated cheques drawn on your salary/savings account.
  • DHFL also allows you to avail loans along with other co-applicants provided that they meet the eligibility criteria set by the lender.

 

Documentation for DHFL Home Loan

For salaried individuals, the lender will ask for the last two months’ salary slip or Form 16, copy of bank passbook and company profile (if it is not a well-known organization) along with the general KYC documents like ID Proof and Residence Proof.

 

On the other hand, self-employed applicants will have to submit the copy of ITR for the last two years, profit and loss statement and balance sheet, last 6 months’ bank statement, copy of shop/business establishment license and a brief profile of the business along with KYC documents.

Rejected Home Loans – Reasons and Steps

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A home loan is one of the most popular types of retail loans availed by people across the country. Individuals can apply for a home loan to purchase a property or a plot. They can also apply for a housing loan to renovate, repair or extend their existing home.

Applying for a home loan can be emotionally quite taxing. When people apply for a home loan, they eagerly wait for approval and expect to get the go-ahead from the lender. As such, it can be quite a crushing blow if the loan application is rejected by the bank or the non-banking financial organisation.

rejected-home-loan

However, instead of getting disheartened, these applicants can take concrete steps to ensure their application loan will get approved if they reapply for a home loan.

Here are a few of the common reasons why a home loan application may be rejected and the steps to make sure that you get your home loan when you reapply.

Reason 1: Bad Credit Score

Resolution: A bad credit score is one of the major reasons behind a rejected home loan application. One of the key factors that severely hits the credit score of an individual are missed loan repayments or credit card bill payments. You can start by clearing off any debt that you might have and then strive to improve your credit score.

If you do not have a credit score, which means that you have no credit history, there are fewer chances of you getting a home loan. If your application is rejected for this reason, then you should start to work on your credit score. The way to do is to take small loans or credit cards and pay back on time. This increases your score over time. If you want the home loan on an urgent basis, then you should take someone with a good credit history as a co-applicant. Their score will allow you take the loan without the risk of rejection.

Reason 2: Improper Documentation

Resolution: Another major reason behind the rejection of a home loan application is improper filing or documentation of the loan. It is important for an applicant to fill and sign the application properly and also submit the documents required by the bank to approve the loan application.

To file the application again, the applicant must check out the documentation requirements of the bank for the home loan and submit the application form along with the required documents. It may make sense to talk to the bank or a financial advisor before you apply for the loan.

Reason 3: Multiple Financial Obligations

Resolution: The repayment capacity of an applicant is important to the bank to approve a loan. If an applicant has too many financial obligations such as multiple loans, credit cards, etc., the bank may question the repayment capacity of the individual. They may reject the loan on the assumption that these financial obligations will come in the way of home loan repayment since the applicant is already committed to paying other loans and credit card bills.

In this case, the applicant must first try to clear off any debt that he can and then reapply for the loan. If he has too many loans, then he can pay off all the other debts with a single loan. This will show a sense of financial responsibility and he will be seen as a good candidate for a home loan.

Reason 4: Low Income

Resolution: Low income is another reason why banks reject home loan applications. Basically, the bank assumes that the applicant will not be able to repay the loan on time if his income is below a certain level. In such a case, the applicant can add a spouse or family member with a good income as a co-applicant to reapply for the loan.

Since different banks have different criteria, the candidate can also choose to go to another bank for a home loan. Another solution to this problem is to choose a lower loan amount or a longer loan tenure so that the monthly instalment turns out to be manageable as compared to the income of the applicant.

Reason 5: Unreliable Builder/Area

Resolution: Some banks have more stringent rules than others and check the credibility and reputation of a builder from whom a candidate is planning to buy the property. If the builder does not seem genuine or credible to them, they may reject the home loan application of the applicant. In such cases, the candidate can apply to a different bank for a home loan or choose a different builder.

Sometimes, a bank may have a few areas within a city or town blacklisted for a home loan. If you are planning to purchase a property in this area, you can apply for a home loan from another bank or start looking for a property in a different area.

Popular NBFCs in India offering Home Loans

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The housing finance sector in India is no longer dominated by public sector commercial banks. Non-Banking Financial Corporations (NBFCs), that so far restricted operations to wealth management and advisory services, have now entered the housing finance business. According to a 2016 study by ICRA, the home loan market of India is worth 12.5 trillion dollars, 60% of which is controlled by the commercial banks and the NBFCs operate in the rest 40%.

Increased competition in the Indian mortgages market has resulted in relaxation of lending norms and reduction in rates. Post demonetisation, the government has also reduced home loan rates to foster the growth of affordable housing, which again works out in favour of the homebuyers. So, let us talk about a few NBFCs that are making it big in the Indian housing finance business and at the same bringing people closer to their dream homes.

 

LIC Housing Finance

Initially promoted by LIC of India, LIC Housing Finance is now a public sector NBFC dealing in the Indian home loan business. LIC Home Loans are offered to residents as well as non-resident Indians for purchase or construction of a house or for extension of an existing house. The maximum tenure of LIC Home Loan is 30 years for salaried professionals and 20 years for the self-employed applicants. LICHFL offers housing loans on easy terms and conditions and maintains transparency in its transactions. Some key features of LIC Home Loan are-

  • Competitive interest rates
  • Guidance by skilled professionals
  • Quick loan approval based on the applicant’s income status and credit history
  • LTV Ratio- 85% for up to Rs 20 Lakhs, 80% for above Rs 20 Lakhs and up to Rs 75 Lakhs, 75% for above Rs 75 Lakhs, and 75% for a plot purchase
  • Payment in Equated Monthly Instalments on monthly rest basis
  • Hassle-free documentation formalities

 

DHFL Home Loan

DHFL is one of the most popular NBFCs in India offering home loans to people at attractive interest rates. Fair terms, flexibility and transparency are the three pillars of DHFL Home Loan. This loan can be taken for purchase of a ready-to-move house or an under-construction flat. DHFL caters to both HNIs and mid-segment buyers; the maximum and minimum amount of DHFL home loan is Rs 5 Crores and Rs 1 Lac respectively. Let’s look at some important features of the housing loan by DHFL-

  • Maximum loan amount is 5 Crores but in no case exceeding 85% of the property’s cost
  • DHFL home loan tenure ranges from 1 to 30 years subject to the retirement age of the applicant
  • The interest rate is based on DHFL’s RPLR which fluctuates from time to time
  • Processing fee of 1.5% is charged, which is non-refundable
  • EMI can be paid through ECS or post-dated cheques drawn on the applicant’s salary account
  • Loan can also be applied for with an earning co-applicant

 

Indiabulls Home Loan

Indiabulls caters to the widest range of homebuyers and is counted among the preferred home loan lenders in the country. The company understands varied needs of its customers and offers customized home loan products accordingly. Indiabulls home loan can be taken for purchase of flat/bungalow/plot, construction of a house or the extension of an existing house. Unlike other lenders, Indiabulls offers maximum loan amount, that is, 90% of the property cost (for properties up to Rs 30 Lakhs). The maximum tenure is 30 years. Given below are a few salient features of Indiabulls home loan-

  • Loan can be taken individually or with co-applicant/s
  • Home loan is offered at adjustable rate of interest which is linked to IHFL benchmark rates and is subject to change
  • Pre-approved home loan facility is also available
  • Facility offered to resident Indians as well as NRIs
  • Online management of loan account
  • Zero prepayment or foreclosure charges

Apart from LIC, Indiabulls and DHFL, several other NBFCs like Muthoot Finance, Capital First, TATA Capital, Shriram Housing Finance are also operating in the market. These NBFCs, though quite experienced in the financial services field, need to sharpen their skills in the home loan market. Changes in guiding rates and the regulatory framework put pressure on these companies to provide better services at competitive rates. Overall, the future is definitely bright for NBFCs operating in the Indian housing finance sector.

Interest Rates and Charges of HDFC Bank Car Loan

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The Housing Development Finance Corporation Limited (HDFC) Bank offers competitive car loan options for its customers.  A wide range of loan options are available for applicants to choose from where the interest rates are customised as per the applicant’s financial history. HDFC Bank is known as one of the most customer-friendly banks and the applicant can get his car loan approved at low interest rates in a matter of few minutes.

Most banks offer similar interest rates on car loans for a specified tenure but HDFC Bank offers highly flexible interest rates and tenure period. As a matter of fact, HDFC Bank offers the highest tenure of 84 months to its customers to repay the car loan. Let us peruse the interest rates and charges for the HDFC Bank car loan.

 

HDFC Car Loan Interest Rates and Fees*

Loan Features Rates
Interest Rate Starting from 9.35%
Processing Fees Rs 10,000 or 0.4% of the sanctioned car loan, whichever is lower
Foreclosure Charges 3-6% depending on the period of the loan (no foreclosure for car loans sanctioned less than 6 months before)
Documentation Fees Rs 600 every time
Penalty for Late Payment 2% each month
Financing Quantum Up to 100% of the on-road price of your car depending on the customer’s profile.

 *The facts and figures provided above are indicative and liable to change periodically.

 

Car Loan Amount

The amount sanctioned by the bank for buying the car is known as the car loan amount. This amount depends on the income of the applicant and the net on-road price of the car. The car loan interest rates vary from one customer to another.

On new cars, the bank provides the loan amount of up to 100% of the on-road price which can be up to 6 times the annual income of the applicant and up to Rs 1.5 Crores.

For pre-owned cars, loans of up to 80% of the price of the car can be sanctioned that can be up to a maximum of Rs 50 Lakhs.

 

HDFC Bank New Car Loans Interest Rates & Charges

Charges New Car Loans
Documentation Charges* Rs. 600 per case
Foreclosure charges* No foreclosure is allowed before 6 months of sanctioning of the loan.
6% of the outstanding loan amount for preclosures within an year from 7th EMI
5% of the outstanding loan amount for preclosures within 13-24 months from 1st EMI
3% of the outstanding loan amount for preclosures after 24 months from 1st EMI
Part-Payment charges* Part-payment is applicable once 12 EMIs have successfully been paid.
Part payment is applicable twice only during the complete loan tenure and at most once in a year. The part payment will not be more than 25% of outstanding loan amount in any case.
5% on the part-payment sum in case part-prepayment is within 13-24 months from 1st EMI
3% on the part-payment sum in case part-prepayment is after 24 months from 1st EMI
Processing fees* (Non- refundable) 0.4% of Loan Amount or Rs 10,000, whichever is lower
Loan cancellation In case of cancellation, the customer shall pay the interest on the loan amount from disbursement date till the refund of disbursement amount. Processing Fee, Stamp duty and Documentation Charges are non-refundable and would not be waived off.
Collateral Charges* Rs 450 per case
Loan Reschedulement charges/ Rebooking charges Rs 1,000/- will be charged. If changes are to be made on RC, refundable Security Deposit – non-interest bearing of Rs 5,000 is necessary. The borrower has to provide the transferred Registration Certificate to the bank.
LPG/ CNG NOC/ Other Special NOC Rs 500/-
Late Payment Penalty 2% per month
Rack interest rate 11.50% to 13.75% depending on the segment in which the vehicle lies
Stamp Duty (Non-refundable) The original cost
Amortisation Schedule Charges The customer can download the schedule from E-Delight for free. Rs. 200/- per schedule would be charged at the customer service desk.

 

Interest Rates

The rate of interest on the car loan varies from 9.35% to 14.29% in case of new cars. The rate of interest is however, higher for pre-owned cars and it varies from 14.50% to 17.50%, depending on the segment in which the car lies. All interest rates are calculated on the monthly reducing balance.

These rates and charges are some of the lowest charges among all banks providing car loans. It is necessary to go through the loan procedure and understand all the requirements, terms and conditions and obligations before opting for the loan.

HDFC Bank car loans are quick to get sanctioned and require very less amount of paperwork. The interest rates are highly competitive and the quote by the bank is worth considering. Taking into account the features and ease with which these car loans get sanctioned, the HDFC car loan is probably, one of the best car loan on offer today.