4 Smart Tips to Enhance Your Personal Loan Eligibility
Banks/NBFCs usually consider loan applicants with credit scores of 750 or above as more financially disciplined and thereby, have lower chances of defaulting on their loan repayments.
FollowPersonal loan is one of the most popular forms of credit to deal with financial shortfalls and emergencies. Personal loans have quicker disbursal than most loan types and require no collateral. Moreover, the personal loan proceeds can be used for any purpose except for speculative purposes. However, the absence of collateral increases the credit risk for the lenders. This leads lenders to be more stringent during the personal loan evaluation process as compared to secured loan alternatives.
Here I have listed down 4 smart tips which will help you to strengthen your personal loan eligibility.
Improve/build your credit score
Banks/NBFCs usually consider loan applicants with credit scores of 750 or above as more financially disciplined and thereby, have lower chances of defaulting on their loan repayments. To attract such loan applicants, most lenders have started to offer lower interest rates to applicants having higher credit scores. Although several lenders approve personal loans to those with lower credit scores, such applicants are usually charged higher interest rates to make up for their higher credit risk. Thus, maintaining a strong credit score has become crucial for availing personal loans. However, building good credit scores can take time and the requirement for a personal loan could arise at any time. The only way to maintain or build your credit score is to make a habit of periodically fetching your credit report and taking the necessary actions to improve your credit score. Reviewing credit reports on a regular basis can also assist them in identifying inaccurate or clerical errors that are lowering their credit score.
Following sound financial habits, such as paying off credit card balances and EMIs on time, keeping your credit utilisation ratio under 30% and monitoring loans guaranteed or co-signed by you will help you strengthen your credit score.
As consumers are entitled to a free credit report from each of the four credit bureaus once a year, fetch your free credit report from all four credit bureaus to ensure that you receive one credit report per fiscal quarter. Alternatively, you can also access free credit reports with their monthly updates by visiting online financial marketplaces like paisabazaar.com.
Assess your EMI affordability
Lenders usually prefer lending to borrowers whose total loan repayment obligations, including the EMI of the new loan, are within 60% of their monthly income. Applicants exceeding this threshold have fewer chances of availing a personal loan. Thus, applicants should evaluate their EMI affordability after factoring in their insurance premiums, existing EMIs, mandatory monthly expenses, etc. from their monthly income before opting for loan tenure and EMI.
Note that a smaller EMI will result in a higher interest cost but a longer tenure, whereas a bigger EMI will lead to a lower interest cost but a shorter tenure. Also, take into account your monthly investment contributions towards your key financial goals while working out your EMI affordability. Doing so will increase your loan approval chances while reducing the chances of EMI defaults caused by aggressive repayment schedules.
Avoid enquiring with multiple lenders within a short span
Lenders fetch credit reports of the loan applicants to assess their creditworthiness. Credit bureaus consider these lender-initiated credit report requests as hard inquiries and reduce the credit scores of the applicants by a few points. Therefore, applying for personal loans with multiple lenders within a short span can significantly reduce your credit score and thereby, reduce your eligibility for availing personal loans at lower interest rates.
Instead of making personal loan applications or enquiries directly with several lenders, visit online financial marketplaces to compare different personal loan options offered by various lenders based on your credit score, employment type, monthly income, employer’s profile, etc. While these online financial marketplaces also fetch your credit report while offering you different loan options, credit report requests raised by them are regarded as soft inquiries and therefore, do not impact credit scores.
Add a co-applicant
Adding co-applicant(s) in a loan application lowers the credit risk for the lender as the co-applicants also become accountable for the timely repayment of the loan. Therefore, those who have lower odds of obtaining personal loans due to their poor credit score, insufficient income, inadequate repayment capacity, etc can raise the chances of loan approval by offering to add earning family member(s) as co-applicants. Moreover, adding a co-applicant can help you get a larger loan amount or a shorter loan term as the income of the co-applicant(s) is also taken into account when determining the loan repayment capacity. However, note that any delay or default in the repayment of a personal loan with co-applicants would also have a negative effect on the credit score of the co-borrower(s).
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