Consumer Credit Loans

8/12/2019 Consumer Credit Loans

http://slidepdf.com/reader/full/consumer-credit-loans 1/19

Consumer

Credit &

Loans



Loan, Credit & Debt

All point out to one & same thing.

Loan is arrangement with a bank or lending

agency.

Debt is that which is owed.

Credit is lending agency's belief or confidence

in repayment ability of borrower.



Consumer Credit

• Consumer credit refers to the use of credit for

personal needs by individuals & families.

• For Financing current purchases:

– Use their present earnings

– Use their savings

– Borrow against expected future income



Types of Credit

• Consumer credit can be :

• Closed end credit (for specific purpose & specific

amount)

• Mortgage loans, automobile loans, installment

loans

• Agreement has repayment terms, payment

amount, cost of credit.• It can be installment sales credit, installment cash

credit, single lump sum credit.



Types of Credit

• Consumer credit can be :

• Open end credit (for unspecified purpose & un

specified amount, upto line of credit)

• Credit cards, cards issued by departmental stores,

travel cards etc.

• Personal loans sanctioned.

• Line of credit is amount that lender makesavailable to the borrower which he may or may

not use.



Types of Loans



Measuring Your Credit Capacity

*Not including house payment which is a long-term liability

GENERAL RULES OF CREDIT CAPACITY

Debt Payments-to-Income Ratio

monthly payments*

net monthly income

Consumer credit payments should notexceed a max of 20% of your net income

6-7



Measuring Your Credit Capacity(continued)

GENERAL RULES OF CREDIT CAPACITY

Debt To Equity Ratio

total liabilities

net worth*

= Should be < 1

*Excluding home value 6-8



Credit Bureaus in India

• CIBIL

• Experian

•

EquiFax• High Mark

• Out of all these CIBIL is most widely used



CIBIL& credit scoring CIBIL collects and maintains records of an individual‘s

payments pertaining to loans and credit cards. Theserecords are submitted to CIBIL by banks and other lenders,on a monthly basis.

This information is then used to create Credit InformationReports (CIR) and credit scores

CIBIL’s TransUnion Score 2.0 and the CIR are very importantin the loan approval process.

Once the loan provider has decided which set of loan

applicants to evaluate, it analyzes the CIR in order todetermine the applicants eligibility. Eligibility basicallymeans the applicants ability to take additional debt andrepay additional outflows given their current commitments.



How to improve credit score

• Always pay your dues on time

• Keep your balances low

• Maintain a healthy mix of credit

• Apply for new credit in moderation

• Monitor your co-signed, guaranteed and joint

accounts monthly

• Review you credit history frequently throughout theyear



CIBIL’s Trans union score 2.0

These scores depend upon –

1) Amount overdue and days past due,

2) Credit Utilisation

3) Credit Mix

4) Number of Enquiries and

5) Age of an individual



Credit history of less than 6 months

S 2 0 d i t t ti



Score &Index

Interpretation(i.e., for whom does this scorereflect)

NA orNH

•

Individual has no credit history & it has not been reportedto us.•Individual has no credit history but has only beenenquired upon•Individual has credit history but none that is reported inthe 24 months prior to enquiry.•Individual has a credit history but it has not beenreported to us in the last 24 months.

1-5 •Individual has a credit history which is less than 6

months, hence a risk Index is returned•Higher the index, lower the risk

300-900

• An individual with a credit history of more than 6 months(in the last 24 months)•Higher the score, lower the risk

Score 2.0 summary and interpretation:



A CREDIT SCORE 750 IS

GENERALLY CONSIDERED A

GOOD SCORE

79% of the loans or credit carddisbursed are to individuals with aCIBIL TransUnion Score greater

than 750.

(source: cibil.com)



Steps for Calculation of loan eligibility

by banks

Bank will look at Income statement (salary slips,tax returns, bank statements). Total monthlyincome by adding up salary, interest income,rental income, if any etc.

It will then calculate the amount you save. Sincesavings depend on a variety of factors like incomelevel, lifestyle etc, there is a standard thumb ruleof 30 per cent that banks apply to arrive at this

number. That means, if your gross income is Rs50,000 per month, the bank assumes that yousave 30 per cent, that is Rs 15,000 per month.



Steps for Calculation of loan eligibility

by banks

If you are already paying some other EMI, that amountwill be reduced from the calculated savings. So if yoursavings per month is Rs 15,000 and you are paying anEMI of Rs 2,400 on your car loan, the bank will arrive at

a figure of Rs 12,600 as your net savings.

So if your monthly net savings is Rs 12,600, the bankassumes that that is the amount available to pay off theEMI. If the prevailing interest rate is 10 per cent and

you have applied for a loan tenure of 10 years, you willbe eligible for a loan of Rs 9.5 lakh.



DETERMINATION OF ELIGIBILITY CASE 1*

•

INCOME : 50,000•TOTAL EMI'S BEING PAID : 10,000

•EMI TO INCOME RATION : 20%

•TOTAL BORROWING CAPACITY : 50%25,000

•EMI THAT INDIVIDUAL CAN AFFORD : 15,000

•BASIS THIS EMI, TOTAL ADDITIONAL LOAN THAT MAY BE

SACTIONED AT AN INTEREST RATE OF 10% OVER 20 YEARS= 15,00,000

LOAN APPLICATION IS LIKELY TO GET APPROVED



Case 2*•Income : 1,00,000•Total EMI's being paid : 50,000•EMI to Income Ration : 50%•Total Borrowing Capacity : 0

•Total Incremental EMI that individual can afford

: 50,000 - 50,000 = 0•Basis this EMI, total additional loan that may besanctioned at an interest rate of 10% over 20 years= 0

LOAN APPLICATION IS LIKELY TO GET REJECTED

Consumer Credit Loans

Documents

Transcript of Consumer Credit Loans