A personal loan is a great way to borrow money without any collateral. It is easier to apply and does not demand a lot of paperwork. It has a flexible end-use purpose, meaning you can use the loan to meet unexpected and unplanned expenses. It is disbursed for various purposes like education, wedding, vacation, medical, etc.
Like other loan types, personal loans have eligibility criteria you must fulfill to get quick approval. The risks associated with personal loans are inherently high due to the lack of collateral. Therefore, lenders provide personal loans only if the applicant fulfills their eligibility criteria. In this article, we will discuss six ways to increase your chances for personal loan approval and factors to be considered while taking a personal loan.
1. Maintain a good CIBIL/Credit score: Lenders check your credit score
before providing loans or any other credit facility. This is a 3-digit number,
with 300 representing the lowest score and 900, the highest possible score. A
CIBIL score indicates your creditworthiness. Therefore, applicants with a high
CIBIL score have a higher probability of loan approval. Additionally,
individuals with high CIBIL scores can access more exciting offers and
opportunities like pre-approved loans, cheap interest rates, increased credit
card limits, etc. Individuals with a 750+ credit score are generally desired. Your CIBIL score is influenced by credit payment history,
exposure to other credits, etc. Paying your credit and loan dues on time
improves your credit score. Also, utilise only about 30% of your credit to
increase your CIBIL score. Do not use up all the credit available to you, as it
harms your credit score.
2. Include all your other income sources: Lenders consider your income level while examining your loan application. As your income increases, the maximum loan amount available also increases. Individuals with high-income levels pose a lesser risk than low-income individuals. As your income increases, you can easily repay your loan amount. To increase the possibility of your loan being approved, include all your income sources like dividend payments, profit from businesses, and any other income. The higher the income earned, the lesser the risk posed to lenders.
3. Co-borrowing: Co-borrowing allows an applicant to partner with another
individual to apply for a credit facility. This is generally advised if you
suffer from a low credit score. For instance, if you have a low CIBIL score and
are co-borrowing with your dad, who has a high credit score. The lender will
also consider your dad’s high credit score while considering your loan
application. Your risk profile to the lender declines as they consider the
higher repayment ability of your dad. This can result in your loan application
being authorised at a lower interest rate. Co-borrowers share the same
liability for the loan amount. So, if you have a high CIBIL score, and someone
wants to co-borrow with you due to their low score. Ensure that the other
person can pay his share of the repayment amount timely.
4. Do not apply to multiple loans simultaneously: Each time you apply for a
loan, the recipient of your loan application does a credit check to decide
whether or not to approve the loan. This form of credit inquiry by the lender
is called a hard inquiry. Every time a lender conducts a hard inquiry to check
your credit background. It is reflected on your credit record. Too many hard
inquiries at a point in time significantly impact your credit score. It makes
you seem desperate for credit facilities. Lenders typically avoid desperate
loan seekers as the risk is considerably high. Keeping a minimum of 6 months
between your loan applications is generally recommended.
5. Low debt-to-income ratio: This ratio considers an applicant’s debt
obligations and monthly income earned. For instance, if your salary is Rs.
30,000 per month and you have to pay a monthly EMI amount of Rs. 8,0000. Then,
your debt-to-income ratio is 26.7%. Maintain your debt-to-income ratio only to
30% to 40%. If you have a high debt-to-income ratio, bring down the ratio to
the recommended 30% or 40% level before applying for another loan. Lenders take
into consideration the monthly income earned by you to determine your loan
repayment ability. A high debt-to-ratio is
considered risky, resulting in the rejection of your loan application even if
you fall under the high-income level.
6. Carefully select your lender: Numerous lenders have different eligibility criteria depending upon their business model. Before applying for a personal loan through a lender, check for the lender’s personal loan eligibility criteria. If you do not qualify, don’t apply for the loan. This prevents the lender from conducting a hard inquiry of your credit score, thus avoiding unnecessary hard inquiries that significantly impact your credit score.
● Eligibility: Check whether you fulfil the criteria specified by the lender. If you do not satisfy the requirements, improve your credit score and apply when you have a good CIBIL score. Avoid repetitively applying for loans that you are not eligible for. As mentioned earlier, this has a significant impact on your credit score.
● Trustworthy: Take loans only from an RBI-registered lender. There have been many reports of unscrupulous companies scamming people into paying more on the pretext of giving out loans. Taking out a loan is a significant financial decision that will impact your creditworthiness in the long term. Therefore, deal only with a well-established and reputed lender.
● Loan Detail: Read and understand the details of the loan. You should know the interest rate, repayment schedules, processing, and other applicable charges. If available, opt for a flexible repayment schedule. This means that you can plan your repayment timeline according to your preferences. Besides this, avail of the loan with the lowest interest rate. The interest the lender charges will significantly influence the loan amount you need to repay.
Although personal loans are very accessible, they should be treated cautiously. Consider the factors mentioned above while taking out a personal loan. If you are not eligible for a personal loan, gradually improve your credit score by utilising the tips given in this article. Apply for personal loans only if you qualify.