What is Credit Appraisal?

Have you ever wondered how lending institutions approve or reject loan applications? While there are several factors involved in a lender’s eligibility criteria, a credit appraisal is a key part of a lender's decision to accept or reject an applicant. It helps them decide whether the borrower can comfortably pay back the loan. Along with the approval decision, credit scoring can also influence loan terms such as interest rates.

Understanding the credit assessment process in loan analysis is important as it can help strengthen the quality of your application. In this blog post, we will cover what is credit appraisal, the process involved, and its benefits.

What Is Credit Appraisal?

A credit appraisal evaluates a borrower’s credit history and financial profile for the risk evaluation of lending to them and their ability to repay the loan. This involves taking a look at their financial status, salary, assets, and liabilities. The lower the risk involved, the higher the applicant has chance of getting the loan approved. Lenders use this information to decide whether to accept or reject the application and set the terms and interest rates for the loan. While each lender has a different method of deciding an applicant’s creditworthiness, the credit appraisal process remains a key part of risk analysis.

What Is the Credit Appraisal Process?

The credit appraisal process typically involves the financial institution analysing and verifying the information provided by the applicant, such as income proof, bank statements, and identity documents. The lender will also review your credit history, including past loan payments and existing debts, to assess your financial stability and ability to repay the loan. 

What Are the Benefits of the Credit Appraisal Process for the Lender?

1. Credit appraisal helps lenders identify borrowers who are at a lower risk of defaulting on the loan, reducing potential financial losses for lenders.
2. A thorough analysis of the borrower’s assets and liabilities allows for more informed decision-making on approving or rejecting loan applications.
3. Insight into a borrower’s credit history and financial situation lets lenders set appropriate loan terms like interest rates and repayment schedules.
4. Credit check increases financial transparency between borrowers and lenders by providing a clear picture of the former’s financial health.

How Does a Lender Evaluate the Eligibility of a Borrower Through Credit Appraisal?

There are many different factors lenders consider when conducting a credit appraisal. Some of these are:

1. Income level: This involves either salary through a stable job or business income. Lenders may also consider the duration of employment and any additional income sources to gauge income consistency and reliability.
2. Credit history and score: This includes any loans or debts taken in the past. A good credit rating, involving timely repayments and low default rates, reflects positively on the applicant and increases the likelihood of loan approval. It is also beneficial to avoid taking on new debt or closing old credit accounts shortly before applying for a loan as these actions can negatively impact credit scores.
3. Debt-to-Income (DTI) ratio: This is the ratio of the borrower’s current financial obligations to their income. This will help lenders analyse if the borrower can comfortably repay additional debt. A lower debt-to-income ratio (30% or below) indicates better financial health and a higher capacity to take on new debt.
4. Collateral: In the case where an asset is used to secure the loan, the lender will evaluate the quality of the asset and estimate its value at the time the loan matures. High-quality collateral with a stable or appreciating value can reduce the lender’s risk, making the loan terms more favourable for the borrower. Therefore, the Loan-to-Value (LTV) ratio, i.e., the ratio of the loan amount to the appraised value of the collateral, can also be considered. Examples of collateral include real estate, vehicles, and other valuable assets.
5. Other factors: Depending on the loan type, factors such as your age and current market conditions and how they might affect the borrower’s repayment ability can also be considered.

Understanding these factors can help borrowers prepare for the credit appraisal process and improve their chances of securing a loan with favourable terms.

Conclusion

Understanding the credit appraisal process is important when applying for a loan or any form of debt. Lenders undertake a thorough financial assessment of an individual’s credit history to determine the risk associated with lending. This financial review will be one of the crucial deciding factors of the loan application’s success, as well as the loan terms they receive. 

At SMFG India Credit, eligible candidates with a strong credit history can enjoy flexible repayment schedules and interest rates as low as 13%* per annum. Apply now!