Loans act as an invaluable gateway to bring us a step closer to achieving our financial goals such as owning a house, car, or taking care of a child’s higher education. It can also bail us out of unforeseen financial emergencies, like the ongoing COVID-19 induced lockdown which may lead to liquidity mismatch, cash flow disruptions and income uncertainty in the near future. Therefore, it becomes imperative for us to know how we can improve our loan eligibility prospect and avoid rejection of loan application.
While the ongoing lockdown is likely to impact your loan processing and disbursal due to limited staff and working hours, keeping in mind these five tips will certainly boost your loan approval chances, whether you avail it sooner or later:
1. Add co-applicant or guarantor
Insufficient income, low credit score, higher FOIR or failure to meet other eligibility criteria set by the lender can lead to the rejection of a loan application. To prevent this, you can opt for a joint loan with a co-applicant/guarantor, who would be equally liable to pay off the loan EMI, thereby reducing the credit risk. While adding a co-applicant and/or guarantor, make sure he/she has a good credit profile, including stable income, good credit score and satisfactory repayment capacity. This would enhance the overall loan eligibility and thereby, boost loan approval chances.
Adding a co-applicant can help avail a higher loan amount, if required. However, keep in mind that any delay or default in loan repayment would adversely impact the credit scores of both primary applicants and that of co-applicant/guarantor(s).
2. Choose a longer tenure
Those facing loan approval hurdles can choose a longer tenure, given that it implies lower EMI outgo. Use online EMI calculator to choose the ideal tenure whose corresponding EMI and applicable interest rate matches your repayment capacity. However, as longer loan tenure translates into higher interest payout, you must either try to make part prepayment or foreclose the loan whenever you have surplus funds. Ensure that overall interest savings through prepayment should significantly outweigh the prepayment charges, if any.
3. Build or improve a strong credit score
Credit score is one of the first filters factored in by lenders to assess your credit worthiness. Many lenders have also started factoring in your credit score while setting your loan rates. Moreover, under the external benchmark regime, banks have the discretion to review credit risk premium components of your loan, in case your credit profile undergoes a substantial change. This makes it imperative for you to build or improve your credit score before applying for a loan.
Those who are new to credit can build their credit history by adopting a disciplined approach towards credit cards and clearing off the outstanding dues on time and in full. Those who have a low credit score should try to contain their credit utilization ratio within 30%, maintain a balanced credit mix, monitor co-signed/guaranteed loans, periodically review their credit report and repay loan EMIs and credit cards bills timely.
4. Reduce your FOIR to 40%-50%
FOIR (Fixed Obligation to Income Ratio) is the proportion of your income currently being used for repayment of mandatory debt obligations such as loan EMIs, insurance premium, SIP contribution etc. Lenders usually prefer lending to those with FOIR within 40%-50% mark (including new loan’s EMI). Applicants with higher FOIR are more likely to default, given that a major proportion of their income is already being consumed for mandatory debt repayments. Therefore, maintaining FOIR within the range is vital. If your FOIR is higher than 40%-50%. consider prepayment, either partial or full, of some of your existing debts, preferably the costliest ones such as personal loan or outstanding credit card bills, or go for loan consolidation, to bring down your FOIR within the stipulated range. In case of the latter, opting for a fresh loan at lower interest rate can not only help avoid repaying multiple EMIs, but also lower the overall interest cost as the new loan would be availed at a lower interest rate.
Existing home loan borrowers can opt for top up home loan, since its interest rate can be at as low as 7.5% p.a, usually lower than other loan options such as personal loan, loan against credit card, gold loan etc. This way, you would only be left with repayment of ongoing home loan and top-up loan, rather than multiple high cost loans and outstanding credit card dues, thereby reducing your FOIR. You can also opt for a personal loan to meet your short to medium term requirement. Its tenure can be anywhere between 1 and 5 years, with interest rate ranging from 8.75%-26% p.a.
Those who are looking for debt consolidation with a long tenured repayment, can opt for secured loans such as a loan against property. It comes with 15-20 years tenure, with interest rates starting at as low as 7.18% p.a.
5. Opt for lower LTV ratio in case of secured loan
Loan to value (LTV) ratio refers to the proportion of the property value sanctioned by the lender in the form of loan amount. This ratio is set by lenders on the basis of their credit risk assessment of the loan applicant. Also, regulators have put compulsory caps on the LTV ratio that can be offered by the lender, such as in case of a home loan, gold loan and loan against securities. Those requiring or planning to avail a secured loan can boost their loan eligibility by opting for a lower LTV ratio as it would imply lower loan requirement, thereby increasing your loan approval chances.
(By Gaurav Aggarwal, Director & Head of Unsecured Loans, Paisabazaar.com)