Ramesh Sarin works with a leading company. Earning a modest 50 thousand per month, he has been living within the means. However, he was in need of immediate funds and applied for a personal loan. The loan got disbursed in a short span and the rate of interest that he got charged on this loan was 13%. He was happy with the deal. Ramesh met one of his old time friends and during discussion the subject of loan came up. His friend Samar was doing well and a net salary of over 1 lakh was getting credited to his account every month. Yet he was surprised to know that Ramesh was able to secure loan at 13% while he was getting charged at a rate of 17%. He concluded that the HDFC personal loans (one that he had taken) were way too expensive than other banks.
While Samar was discontented from the deal but what he could not realize was the fact that the employer also made a difference in the deal that one would get on the personal loan from any lending institution. All lending institutions have a list of company categorized into various levels. The category of company is arrived at considering various factors like scale of business, line of business, existing relationship with the institution etc. Depending upon the category of company the bank may decide to offer a lower rate of interest.
Why this categorization
Stability of income is an important factor that gets considered while deciding the loan application. The borrower working with a large stable organization is presumed to have a safer job continuity and hence the chances of repayment are higher than an individual working with a company with an unknown background.
The fact remains that the financial sheets of these large corporates are available for public view and generates that much more confidence in the business continuity and as an effect job security.
Another factor is that most employees switch jobs for a better pay and enriched role. Which means that the people working with these large organizations will either continue to work with the same company till they get a better role and package. This adds to the comfort to the underwriting process.
In case of an individual, the lender would not want to give loan to one where the risk of non-payment is higher. Say one knows that another person who has requested for a loan of couple of thousand rupees has been an offender on his other hand loan from another colleague, will not get the help. This is possible in a small set up. How would a bank or a non banking finance company mitigate the risk. This can only happen by charging a higher rate of interest from the one who works with a smaller company where the bank is unable to assess the job stability and it’s continuity. Many smaller organizations can take a decision to cut down on the employer strength at any time. While this could also be true to a large organization, the person employed with employer of repute are more likely to get employed faster in comparison to the ones working with smaller entities.
While this may not hold good for all individuals but it is expected that the employees of larger organizations would have a better control over their finances and would have enough financial backing to repay the loan in case of any job loss or other exigencies. They are assumed to be more informed and aware about the importance of credit score and hence would continue to pay without default.
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