By Arun Ramamurthy
Human beings always look for saving money on every deal. After all, money saved is money earned. However, while negotiating for a better deal on smallest of articles, they miss out on one of the critical aspects of financial life that eventually will result into the saving of lakhs of rupees. What we are referring to is one’s credit profile. Popularly known as credit score, it is the rating that a credit bureau assigns to an individual. This three-digit rating which ranges on a scale of 300 to 900 in India is predictive on one’s probability to default on a loan. The higher the credit score, the better is one’s credit profile.
One may be susceptible to the genuineness of the claim that one can actually save a fortune just by being credit healthy, but this is indeed true. Let us look at how a good credit score can lead to adding to one’s financial worthiness.
Lower interest rates
Interest rates have a bearing on the EMI that one pays on any loan. People are unfortunately unaware of the fact that a healthy credit score will make them eligible for a better rate of interest. And if a person has good negotiating power and is aware of the fact that the banks will not mind bargaining, one can get a real good deal on interest. Let us look at an example.
A person would be able to save Rs 7,71,695 in interest alone if there is a difference of 1 percentile in interest rate on a loan amount of Rs 50 lakh. The saving will increase as the loan amount increases. There is a difference of Rs 3,216 in the monthly EMI. If an amount of Rs 3,000 gets invested every month and an average yield of 10% is earned on it, the amount will result into a corpus of Rs 23 lakh over 20 years. So the actual saving would be over Rs 30 lakh, which is about 60% of the loan amount.
While this is an eye-popping number, the actual savings on account of lower interest rates will be far higher than this. The above saving matrix is pertaining to the situation where one only takes a home loan, while that will not be the fact. A person would definitely need a lot more loans during his financial life cycle. A few vehicle loans and couple of personal loans added together can make a huge contribution to the savings of the individual.
Availability of funds
This is also an equally important aspect that results in substantial savings. One does not know when the need of funds would arise. Non availability of loan can severely dent the potential to purchase at a lower cost or can result into loss of opportunity to make money. Let us understand this through examples.
Mr X wanted to buy a house and after weeks of hunt, he was able to find one that suited his needs and budget. He gave an advance but on account of non-availability of a loan in the short term the deal got cancelled. This lead to forfeiting of the advance paid by him.
Mr Y also selected a property but he was smart enough not to give an advance and waited for his loan to get approved. Since it took a long time to get the approval, he lost the deal and had to settle for another property that cost him a higher amount.
Mr Z, a business man, got the opportunity to get a large contract for which he needed funds. Since the deal had a stringent time bound delivery clause, he could not execute the agreement on account of not having enough financial clout and the loan getting rejected. He lost a couple of lakh rupees in this situation.
We come across many such situations in life. The ones above are only indicative and pertain only to the finance required for a deal. In the event of a personal exigency, the loss could be both financial and emotional.
A healthy credit profile adds to one’s bargaining power and can result in a lower processing fee, legal fee, better pre-closure terms etc. All these are only going to add to the savings. The lenders at times may be willing to completely waive such fee for individuals with a high credit rating.
The bottom line
Unavailability of funds at the time of need, a higher interest rate getting charged and higher fee components are the elements that silently impact the cost of funds and loss of opportunities. If one is conscious about the credit scores, he or she will undeniably be able to save lakhs of rupees just by the virtue of being on the right side of the credit bureau.
(The author is Director of Credit Sudhaar)