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How Can a Home Loan Help Maintain Good Credit History?

Highlights

  • Do you know your home loan can ensure a good credit history?
  • Yes, it’s possible! Read this post that tells you how it can ensure the same

Showing due diligence before and after taking a home loan can help you in both times. Before applying for a home loan, which runs for as long as 30 years, you need to check the interest rate and arrange the required down payment to buy a home. But your job does not end here! You also need to ensure a good credit history so that you can get a new loan in the future without any hassle. A good credit history means a credit score of 750 and above and a spotless credit record. All that is possible with a home loan. Read this post further to know how a home loan can ensure that.

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Timely Payment of the Home Loan EMI

Home loans are paid via equated monthly installments, which is a combination of both interest and principal amount. All you need to do is to ensure the EMI payment is done on time and maintain a spotless record. This will boost your CIBIL score and help you maintain a good credit history.

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Long Repayment History

As told above that a home loan can be taken for as long as 30 years. Now it’s up to you to choose the tenure you want to. Given the massive home loan quantum, the tenure will most likely be on the higher side. So, you will most likely have a long repayment history. If you feel for a loan some years down the line, the home loan repayment track can ensure you get the same without any problem. All it takes is some discipline to ensure you pay your home loan EMI on time. In comparison, personal loans are given for a maximum of 5 years and its record will stay for another 7 years. And if you require a loan after that, the lender may not get the repayment track based on which it can sanction the loan.

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But How to Ensure a Timely Repayment So that the History Remains Good?

You’ll need to do some homework before and after taking a home loan to ensure the same. This was told at the very beginning of this article. Let’s begin with what needs to be done before applying for a home loan.

What to do Before Taking a Home Loan?

Before you apply for a home loan, don’t forget to do the following –

Compare Home Loan Interest Rates

At a time when everything is online, comparing home loan interest rates has become a lot easier than what was the case before. Without doing a comparison, you may end up choosing a higher rate of interest, which will increase the EMI. The loan deal can be approved by the lender provided the EMI is within 50% of your net monthly income and you don’t have any running debt obligation. But one should also factor in the contingency times when you could be forced to spend more than what you may fix for. So, the extra space you create by choosing a lower rate and the subsequent lower EMI will help ensure timely payment of the loan. It will help ensure a good credit history.

Optimum Utilization of Savings

The successful home acquisition will depend on how early you start saving for the same. So, if you want to buy a home now, maybe you would have started saving around 3-5 years ago. The saving is important as homes are financed fully. As much as 10%-25% of the property cost has to be borne by you. This is called down payment in a home loan. Plus, there are expenses to make towards stamp duty and registration that are also not financed by home loans. In case you manage to save an extra from what’s required, use that towards paying more down payment to the seller. What it will do is reduce the loan amount you require to buy a home. This will decrease the EMI and make timely repayment an easy task to accomplish.

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What to Do After Taking a Home Loan?

After taking a home loan, you need to avoid spending on unnecessary stuff and look for exciting balance transfer and prepayment opportunities. This will also help ensure a good credit history.

Say No to Unnecessary Expenses

The home loan EMI will take a significant chunk of your income that you will earn monthly. To ensure you pay the EMI on time, it is important to figure out the expenses that are necessary and the ones that you can discard. Credit card expenses are something that needs to be looked into very carefully. At a time when most want to lead a glamorous lifestyle, the use of credit cards is undoubtedly more. But there’s always a tendency of losing control while purchasing credit cards. You can get away by paying the minimum due, which hardly accounts for 5% of the total due, if you can’t pay the total outstanding. But the interest rate on unpaid credit card balance is an astonishing 2.5%-3.5% a month, which goes up to 30%-40% a year. This is like committing financial suicide and more so when you already have a home loan. Spending on a credit card carefully will help you pay both the bill as well as the home loan EMI on time.

Look for Attractive Balance Transfer Facility

As you grow older, the job opportunities don’t remain that bright as it might be the case now. Plus, the inflation will not ease but rather eat into your income at a faster pace years down the line. In case you come across such a situation, paying the home loan throughout the repayment tenure can become an onerous task. But you can make it simpler by looking for an attractive balance transfer facility. This is a process by which your existing loan can be transferred to the new lender at a lower rate of interest. This will reduce the monthly EMI and help you pay the same on time, a much-needed relief in case you come across a not so bright income situation. But the question is, how can you maximize from a balance transfer? Well, for maximum benefits, the new rate of interest should be lower than the existing one by at least 0.25%-0.50%. The greater the difference, the more will be the savings. Plus, the timing of balance transfer is also critical. Going for a balance transfer when the loan is just 4-5 years away from running its entire course will not reap much gains. The balance transfer when executed within the first half of the loan tenure can lead to maximum savings. Plus, the new lender will charge a balance transfer fee. Keep that in mind too when going for a balance transfer.

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How Can Prepayment Ensure Home Loan Payment on Time?

Saving is a good habit that you should embrace. You never know this can help reduce your home loan liability too over time. Yes, lenders allow a prepayment facility to borrowers without charging anything for the same if it is a floating rate home loan. You can prepay in full or parts anytime during the loan tenure after paying the first 12 EMIs, depending on the surplus funds you have. Considering the inflation and the massive home loan quantum, you may struggle to prepay in full. But saving regularly can help you pay a significant chunk of the outstanding loan balance and you can do it more than once depending on your income and savings from time to time. The part payment will reduce the outstanding loan balance, which will lower interest payments. Needless to say, the EMI will also reduce and help you pay the same easily and on time.

Conclusion

These are some of the ways by which you can maintain a good credit history with a home loan. Do implement these ways in real-time so that you can maximize your savings besides having a good credit history.

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  • Home Loan Interest Rates July 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda6.85% - 7.85%
    Citibank8.20%
    HDFC6.95% - 8.00%
    ICICI Bank7.45% - 8.55%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank7.40% - 9.70%
    LIC Housing7.40% - 8.85%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance8.60% - 9.45%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI6.95% - 7.60%
    Tata Capital9.20% - 9.35%