The ease of availing funds often leads borrowers to overlook some of the crucial aspects of availing a personal loan.
Quick disbursal of funds, zero restriction on end-use, minimum documentation and no collateral requirement make personal loans an ideal borrowing option for those in urgent need of funds. However, this ease of availing funds often leads borrowers to overlook some of the crucial aspects of availing a personal loan. To make sure your personal loan application does not get rejected, here are five important points to consider:
Check your credit score
Credit score is one of the most vital parameters factored in by lenders while evaluating your personal loan application. As a strong credit score can boost your loan approval chances, consider adopting habits such as regularly paying your loan EMIs and credit card bills, containing your credit utilization ratio within the range of 20%-30% and monitoring co-signed loan accounts for maintaining strong credit score.
Also, since your credit score is computed on the basis of information provided in your credit report, it’s important to periodically review your credit report to prevent any errors or possible fraud from getting bypassed and hurting your credit score as well as loan approval chances.
Compare between various loan offers
With almost all banks and numerous NBFCs offering personal loans with interest rates varying anywhere between 10.99% and 26% p.a., it’s important to choose the right lender matching your loan requirements. Consider visiting online financial marketplace to avail the best loan offer as per your requirement and eligibility.
While comparing, make sure you do not limit your comparison to just interest rate, and also factor in processing fee, prepayment charges and other terms & conditions before selecting a particular lender.
Choose loan tenure according to your repayment capacity
While evaluating your personal loan application, lenders assess your repayment capacity by computing your FOIR (Fixed Obligation to Income Ratio), i.e. the proportion of your existing income being consumed in debt repayments, including credit card bills and loan EMIs. As lenders generally prefer lending to applicants having FOIR up to 40-50% (including EMI of the new loan), make sure you opt for loan tenure whose corresponding EMI keeps your FOIR within this range.
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Borrowers whose repayment capacity is low can consider opting for a longer repayment tenure. While doing so, keep in mind that a longer tenure would also imply higher overall interest outgo. To reduce your overall interest cost, consider prepaying your personal loan whenever you have surplus funds, but make sure that the overall saving in interest payout arising from prepayment significantly outweighs the foreclosure charges levied by your lender, if any.
Avoid submitting loan application to multiple lenders
Whenever you apply for a loan or credit card, the lender fetches your credit report from the credit bureau, in order to evaluate your repayment behaviour and creditworthiness. Such lender-initiated credit report requests are treated as hard enquiries by the credit bureau, and each one pulls down your credit score by a few points. Also, making multiple enquiries within a short span of time can depict you as credit hungry, which may lead to lenders rejecting your loan application.
Instead of directly submitting loan applications to multiple lenders, consider visiting online financial marketplace to compare and choose the most suitable loan offer available on your credit score and other eligibility parameters.
Refrain from frequent job switches
Another parameter often factored in by lenders while evaluating your personal loan application is your employment history and stability. As the practice of frequent job hopping is usually considered as a sign of unstable career by lenders, they may hesitate in lending to applicants who have frequently switched jobs in past years. Hence, try to avoid frequent job changes, especially if you are planning to take a personal loan.
(By Gaurav Aggarwal, Director & Head of Unsecured Loans, Paisabazaar.com)