How does financial literacy impact loan approval? 5 key factors you need to know | Mint

Getting a loan which suits your budget and your lifestyle requires thorough research as well as a basic understanding of borrowing and lending. This is where financial literacy comes into play. Financial literacy helps you make mindful decisions on your financial borrowings and helps you plan your financial future responsibly.

Loans have become a popular choice for people who require financial assistance to cover their expenses. Hence, financial literacy has an important role in loan success. Let us understand this in detail

Understanding financial literacy

Financial literacy is the capability to use, understand and apply the knowledge about personal finance including budgeting, saving, investing and borrowing. With financial literacy, loan borrowing becomes easier as it makes you well aware about loan agreements, repayment dates, interest rates and credit responsibility.Financial literacy helps you to not fall under any debt traps and meet your financial needs conveniently.

The effect of financial literacy in loan success

Improved decision making: With financial literacy, you get the ability to compare loan offers. You can evaluate fixed and floating interest rates and other charges related to the loans that meet your financial requirements. For businesses, when owners of MSMEs are financially literate, they are able to get better financing for their businesses which in one way or another determines their success rate.

Budgeting and repayment: Financial literacy can also help you in budgeting your loan repayment smoothly. This way, you can avoid any defaults in EMI payments and calculate your requirement well in advance and stay ahead of your liabilities.

Avoiding predatory lending: Borrowers with poor financial literacy are usually susceptible to lending malpractices like charged up interest rates and additional fees. Having an understanding of the financial market, you can distinguish between good and bad lending organisations and ensure that you do not fall prey to fraud deals which can lead you to debt trap.

Building creditworthiness: Financial literacy also makes you aware of the impact of a good credit score in loan borrowing. With timely repayments, not exhausting credit limits and avoiding taking credit that you do not need, you can maintain a good credit score which is crucial when looking for credit in future on better terms.

Awareness of loan products: With so many loans and their varieties, financial literacy assists you with making a decision on the product that will meet your needs. Using this you can quickly distinguish between personal loans, business loans, and education loans, choosing the best that will suit your goals.

Programs and initiatives aimed at improving financial literacy

RBI’s financial literacy programs: The Reserve Bank of India has set up Financial Literacy Centers (FLCs) with the purpose of educating people, including the rural regions, on the proper usage of money and credits which can help them borrow responsibly and get best deals.

Financial literacy week: Programs such as Financial literacy week include raising awareness of important financial concepts and proper borrowing practices aiming at empowering people towards financial literacy and independence.

Private sector initiatives: Many lenders provide their customers with financial education resources so that they can make a decision consciously.

Challenges in financial literacy

Financial literacy is still very low in India. A large part of the population fails to grasp simple concepts of personal finance and this is why loans cannot be managed properly. Challenges are greatest in rural and semi-urban regions, where there is often little or no financial education. One of the major challenges is also the digital divide where remote areas do not have access to basic banking services as well as internet facilities.

In conclusion, financial literacy plays a major role in loan success. With financial literacy, you can make the best decisions, avoid money mismanagement and ensure that your overall credit health is good. Loans are a great way to seek financial assistance for emergencies as well as for backup resources. Hence, eradicating the information gap is crucial.

(Note: Raising a loan comes with its own risks. So, due caution is advised)