Banking: Don't be overjoyed by a strong Cibil score; the bank will also check these three ratios when you apply for a loan..

People often think that if they have a good CIBIL score, they'll be sure to get a loan. But the reality is that banks don't just look at your score. They analyze your overall financial health to determine whether you'll be able to repay the loan on time.

Banks calculate three important ratios based on your past debts, expenses, and income. Let's explain in simple terms which ratios banks check and why. We'll also understand what you should keep in mind when applying for a loan.

1- Debt-to-Income Ratio

This ratio tells you how much of your monthly income goes toward debt repayment. If your income is ₹1 lakh and you pay ₹25,000 in EMIs each month, your DTI ratio is 25%. The lower the DTI, the safer it is for the bank. If the DTI is high, the bank believes you won't have enough money left to repay the loan.

2- EMI-to-Net-Monthly-Income Ratio (EMI/NMI Ratio)
This ratio indicates how much of your net salary will go toward the existing EMI and the new loan EMI. Banks expect this ratio to be less than 50-55%. If it exceeds this limit, they may refuse to grant a loan or charge a higher interest rate.

For example, if your net income is ₹80,000 and the EMI is ₹48,000, then EMI/NMI = 60%—meaning a higher risk. The bank thinks, "If half of someone's salary is going toward EMIs, how will they manage the remaining expenses?"

3- Loan-to-Value Ratio
This ratio is particularly important for home loans and vehicle loans. It indicates how the loan amount compares to the value of your property or collateral. For example, if you purchased a house worth ₹50 lakh and the bank is offering a loan of ₹40 lakh, then the LTV = 80%. The lower the LTV, the lower the risk for the bank.

Why is a CIBIL score important?
The CIBIL score is a number between 300 and 900 that indicates how you manage your debt. It is based on your past loans, credit card bills, and payment history. If you pay EMIs and card bills on time every month, the score increases. However, if payments are delayed, the score decreases.

Benefits of a good CIBIL score
Loan approval is faster.
Lower interest rates are available.
Pre-approved loan offers are available from the bank.
Instant loan facility (money in your account within minutes).

Disadvantages of a poor CIBIL score
If your score is poor, banks consider you a "high-risk borrower." This can lead to several problems.

1. Difficulty getting a loan
Banks, NBFCs, or small finance banks may hesitate to lend if you have a poor score.

2. Higher interest rates
Banks charge higher interest rates to cover their risk.

3. Insurance premiums may increase
Some insurance companies charge higher premiums for those with poor scores.

4. Problems with home or car loans
You may have to pay higher interest, or the bank may ask for collateral.

5. Delays in loan approval
Banks thoroughly examine documents, which can lengthen the process.

Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.