What is Credit Appraisal? Everything you Need to Know

Think of a credit appraisal as the immediate response to your loan application. Financial firms, be it a bank or NBFC, run this check to see if you qualify for credit, be it a loan or a credit card. This process helps them understand your repayment ability and thereby, the risk they will take on by offering you credit. 

Apart from helping lenders approve your application, this evaluation also helps chart out the loan terms you will be offered. This includes your loan amount or credit card limit as well as interest and charges. 

Read on to know the meaning of credit appraisal, its process, benefits and more. 

What is Credit Appraisal? 

Credit appraisal is a part of the application review process, where lenders assess your creditworthiness. It is also known as a credit assessment or evaluation. During this process, the lender checks your application against general and specific parameters set by them. 

This evaluation helps financial institutions calculate the risk involved in approving your application. If you meet the parameters, the lender will likely approve your application and vice versa. 

In some instances, where you don’t meet all the requirements, you may get a lower loan amount or credit card limit or stringent terms with a high-interest rate. However, this will depend on the lender you choose.

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Credit Appraisal Process

In addition to understanding the credit appraisal meaning, knowing the process is equally important. Lenders begin the credit assessment/appraisal process after you submit your application. Here is a step-by-step breakdown of the process:

Application Processing

Once you apply for credit, the lender will run an initial check to evaluate your profile against the basic eligibility criteria set by them. They will also verify the information provided by you. 

Documentation Request

After the screening of the application, the lender will request you to share or upload all the documents needed according to which type of credit you have applied for. This usually includes:

• Bank statements
• Income tax returns
• ID proof
• Employment proof

Verification

Examining your documents, lenders begin the verification process to check your credit history, income stability, employment history, existing debt and other factors. They may also contact your employers or other references provided by you. 

Financial Assessment

Lenders will also check your bank statements and other financial details to assess your repayment capacity. This will help them understand whether you can repay the loan or are likely to default. 

After this assessment, lenders will decide whether to approve or reject your application. If approved, they will begin the structuring process. Here, they will decide the loan terms, such as loan amount, tenure and interest rates. 

Also Read: What Is Credit Review And How Does It Work

Parameters for Credit Appraisal

As mentioned, lenders carry out the appraisal process based on certain parameters. While these may vary across lenders, there are some general criteria, such as: 

• Credits Score and History

A credit score is a numeric representation of your creditworthiness calculated by credit bureaus like TransUnion CIBIL. With your credit score and report, the lender gets all the information about your experience and behaviour with credit. 

• Debt-to-Income (DTI) Ratio

Also called the fixed obligation to income ratio (FOIR), your DTI ratio tells financial institutions how much of your monthly income goes towards paying your existing debts. 

This helps them assess if you can manage the repayment of a new credit facility. Generally, lenders prefer if you have a ratio under 40%. 

• Income Stability 

When applying for a credit, you must show income stability to ensure that you can repay it on time. Therefore, you must provide your financial records and monthly income data. 

• Employment Verification 

Having a steady source of income with a stable job ensures lenders of low risk of offering you credit. 

• Collateral

If you apply for a secure loan, then the lender also evaluates the collateral’s value and decides the loan amount accordingly. 

Benefits of Credit Appraisal

Here are the key advantages of the appraisal process. 

• Helps financial companies mitigate the risk of lending
• Aids in prudent decision-making and ensuring the safety of funds offered as credit
• Allows lenders to decide on suitable loan terms in accordance with their policies
• Enables accountability and better transparency 

With this information, you can better understand your eligibility and improve your creditworthiness to boost your chances of approval. Knowing the importance of meeting the terms will also help you choose the right lender. After all, applying with a lender whose criteria matches your profile ensures that you get the required funds easily and speedily. 

For simple eligibility requirements and quick approval, you can rely on Fibe. With us, you can easily get an instant Personal Loan of up to ₹5 lakhs in 2 minutes. Download our Personal Loan App or register to apply in just a few clicks. 

FAQs on Credit Appraisal

What is credit appraisal in simple terms? 

In simple terms, credit appraisal is the assessment of a borrower’s creditworthiness and financial capacity to understand the lending risk. 

What is the difference between credit analysis and credit appraisal? 

Credit appraisal is an evaluation of a borrower’s credit profile and the risk posed in offering him or her a loan. On the other hand, credit analysis is conducted by an investor or bond portfolio manager on a company or debt-issuing organisation to evaluate its capacity to fulfil the existing debt obligations. 

What is the role of a credit appraisal manager? 

A credit manager is in charge of supervising the appraisal process by evaluating your creditworthiness. They also structure the loan, draft the loan terms and maintain the record after approval.