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In any economic situation, be it upturn or a downturn, there are a few fundamentals that one should ponder upon while taking care of one’s own finances.
Often, we come across young professionals with disposable income approaching banks for their varied financial needs. Funding new purchases (like home, car, personal loan) by taking loans was not a problem as s/he had a good credit score. Then, a sudden illness in the family or some other emergencies may have forced them to apply for another personal loan to help family with the medical expenses. Given the sound credit score, the young professional was not sure whether the loan application would be approved. Timely payment of education loan and credit card dues had helped build a strong credit history. But the application was rejected by the bank.
While a good credit score is a must, it doesn’t necessarily ensure that your loan application will be approved. The Debt-to-Income ratio being over 50% made the applicant unworthy of securing further credit, despite him/her maintaining a good credit score. Even though the education and personal loans were unsecured, it did not help the matter either.
To illustrate, let’s assume an individual has a net monthly income of AUD 5000 and is servicing loan EMIs of AUD 1500. After setting aside 50% of the income towards living expenses, he is left with $1000. This makes him eligible for another loan say, a $200K home loan or a $15K personal loan—as s/he can service the additional EMI burden from the $1000 surplus money. However, if the monthly expense rises to $3000, he would not be able to secure a loan from almost any lender due to the high debt-to-income ratio.
Another thing to keep in mind is to avoid approaching multiple lenders at the same time as this could be counterproductive. This is due to a phenomenon called ‘loan stacking’ that lenders guard against. Loan stacking occurs when a consumer makes multiple applications with different lenders at the same time in an attempt to get more than one loan before a lender realises that another lender has already given a loan to the applicant. Instead of applying to several lenders, one must research the best options on loan marketplaces- as these helps determine whether one is eligible to get a loan and may also suggest which lender to approach.
So, the points to keep in mind are: stay atop your finances, make sure that your credit score and report are healthy and ensure that your debt obligations never exceed 50% of your income. Also, avoid multiple loan applications and instead research all the options online and then apply to the lender best suited to you.
Mr. Pranay Kumar
Chief Executive Officer (CEO)
State Bank of India, Sydney
Mr. Pranay Kumar has been working with State Bank of India (premier fortune 500 company and among top 50 globally banks) for more than two decades.
Mr. Pranay holds an Executive MBA from S.P. Jain Institute of Management, Mumbai and gained expert knowledge on Merger & Acquisition from IIM Ahmedabad.
Mr. Pranay has extensive hands on experience in Project Finance and in past has managed in deal structuring for Energy, Roadways, Telecom & Hydrocarbon.
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