Published On: Mon, Aug 1st, 2016

Risk Based Lending—A New Era in Home Loans

Savings help you in hard times—there’s no question. However, when you want to buy an asset like a home, it entails a huge investment, making it imperative to choose an external source of financing—such as a Home Loan. With most banks and financial companies going digital, you can get an online Home Loan in a jiffy, so long as you satisfy the eligibility criteria laid down by the lending bank.

When you are in need of a loan, you do your homework on the interest rates charged, processing charges, prepayment charges of a few banks, and zero down on the bank that charges a low interest on the loans disbursed. Irrespective of your financial strength, all borrowers falling in a particular category are charged the same interest rate.

Risk-based lending is a relatively new entrant in the loan market that offers borrowers interest rates based on creditworthiness. Differential interest rates are charged once the lender reviews your credit history.

About Risk-Based Lending

This is, simply put, the process of charging different interest rates from customers based on their creditworthiness. The lender assesses the risk attached to a customer, and charges a higher interest rate on the loan for a high risk customer.

If the lender feels that the prospective borrower is likely to default in loan repayment, then a higher interest charge is levied. Conversely, if you have a good credit score and have serviced your other loan commitments on time in the past, you can get a loan at a lower rate of interest.

While the lenders are within their right to charge differential interest rates, they are regulated by the RBI directives. It has been recently laid down by the RBI that lenders will have to submit a range for a particular category and the risk-based lending rate cannot be more than the maximum limit.

What Factors Determine The Risk Based Lending Rate?

Lenders draw up their own checklists to determine the risk associated to a borrower. The primary factors under scrutiny by lenders include your credit score, income, employment status and other outstanding loans. Lenders rely on the CIBIL report as any loans that you take make a direct entry into the CIBIL report which tracks all your borrowings and repayments.

Benefits of Risk-Based Lending

To avail any type of loan, you will need to satisfy certain eligibility criteria laid down by the bank. In case you have a bad credit score, and have defaulted on some loan payments, your loan application will be rejected in the normal course.

However, risk based lending offers an opportunity to customers who have been denied loans. You will be eligible for a loan, but at a higher interest rate payments. The lending bank covers the risk of default by charging a higher interest rate.

Getting Home Loans on Risk-Based Pricing

Applying for a Home Loan is quite easy. Most banks accept online Home Loan applications . You can also crystallize your borrowing using the Home Loan eligibility calculator. Based on the loan amount you qualify, you can know your EMI outflows by employing a housing loan emi calculator.

If you are a high risk investor, then availing a Home Loan becomes a little difficult. A window of opportunity has opened up for such borrowers in the form of risk based pricing. Your credit worthiness determines how much interest you will have to pay on your Home Loan.

Under such a system of lending you will surely be able to get a Home Loan, albeit at a higher interest designed to protect the bank from their perceived risk from your bad credit score. The risk-based pricing is beneficial to both high risk investors as well as those who enjoy high credit scores.

Despite being a high risk borrower, you will be able to source a loan from a bank. A low risk borrower gains in terms of lower interest rates, which can significantly bring down the cost of acquisition.

Risk-based pricing has recently been under fire as it is akin to predatory pricing, extracting high interest rates due to poor credit scores. However, there is another school of thought that risk-based lending has opened up an avenue for those who can’t secure loans because of their poor credit history; thus improving their chances to finance an asset purchase.

Despite its numerous pros and cons, risk-based lending is here to stay and borrowers are open to tapping this source to gain better interest rates. Such a system also acts as an incentive for borrowers to improve their credit scores and gain access to credit at favourable terms. There’s something for everyone with this system!