What is loan cycle?
The period from applying for a loan to paying off the loan with interest to the lender is referred to as the loan cycle.
What are the stages of a loan cycle?
Stage 1 – Financial calculations
Based on the type of loan you want to avail – home loan, business loan, property loan, education loan or any other kind of loan, you have to decide on the amount you want to borrow. Make a chart of your monthly income and monthly expenses to find out the amount of money you will be able to pay back to the bank as easy monthly installments (EMI) or use our free online EMI Calculator when you avail a loan. It is crucial to have this calculation ready because banks scruitinize your documents and information to gauge your ability to pay back the loan.
Stage 2 – Research
Check out the loan schemes that banks are offering for the product you want. Compare the interest rates and hidden charges of each bank. Decide on the one that is offering the lowest rate of interest with no hidden charges.
Stage 3 – Loan application to the bank
Fill up the loan application form with complete and accurate information. This information will be verified by the bank. All the supporting documents are to be submitted to the bank along with the loan application. These documents are as requested by the lender for verifying your information and financial capability to pay the loan back to the bank.
Stage 4 – Verification
Each bank has their own verification process. Timeline for verification through online submission of loan is one week or seven working days. Once the paperwork is verified and the bank is satisfied with your financial background and credit history, they proceed to the next stage.
Stage 5 – Loan sanction and disbursement
Once your credit worthiness is verified by your CIBIL score and backend verification process of the bank is satisfactory, your loan is approved. Loan amount is disbursed in full or in part to your bank account as decided in the terms of loan agreement.
Best practices of a bank loan cycle
Make a monthly budget
Keep track of your monthly income and how it is spent. Track all your expenses in one month, no matter how trivial it may seem. It is the trivial expenses that end up mounting up to be huge expenses. At the end of the month, see the amount of savings of that month. If you set aside some emergency funds, what is the fixed amount of money you will be able to freely contribute to pay off a loan if you take one? Write that down.
Check whether you can afford borrowing
Track your expenses month-on-month for about three months. Mark and cut down on the unnecessary expenses as and when you find them. Find alternate ways to manage without having to spend money on trivial things. Select the minimum range/amount of money you will be able to set aside every month based on the spend of the three months documented. Only if it is a sizable sum, it will cover up an EMI. Every bank or lender will want to know your repaying capacity before they lend out a loan.
Understand the fine print
Loan documents contain financial terms and details. It is always a good idea to clarify anything that is not clear. Make sure you understand everything that’s in fine print in your loan agreement. All the charges, terms and conditions pertaining to the loan you are to avail will be available on your loan agreement. You will be charged and be expected to abide by the agreement through your loan cycle. So, it is best to make sure you understand every bit of it. If there’s something you don’t agree with or do not understand, clarify it with a bank official or credit advisor. In case it is still continues to bother you, do not sign on the dotted line.
Pay EMI on time
Timely payment of monthly installments increases your credit score. Late payment carries penalty and lowers your credit score. Also, it increases the amount of interest to be paid because the amounts weren’t paid on time as decided in the loan agreement.
Automate debt payment
Automate your EMI payment to be deducted from your savings bank account to your bank. Set the date on which you would receive your salaries. If you are self-employed, set a date that falls on the first week of every month. This will make sure that your liability is taken care of.
Avoid borrowing if already in debt
If you have already taken a loan, you’ll know by now how banks and lenders waste no effort in recovering their loan. So, if you are in debt already, avoid getting another loan. For instance, if you already have education loan on your shoulders, avoid getting a home loan until your education loan is fully paid off. Managing multiple loans is very difficult. Unless absolutely required, do not take up a second loan.
Now that you know what you should do during your loan cycle, be sure to follow it to reap its benefits. If you have taken a loan and have any questions, or, you want to know more about a loan, do let us know in the comments below.